ADVANCINGTHE EITI IN THE MINING SECTOR A consultation with stakeholders The Extractive Industries Transparency Initiative (EITI) is a globally developed standard that promotes revenue transparency at the local level. It is a coalition of governments, companies, civil society, investors and international organisations. Through robust yet flexible methodology company payments and government revenues from oil, gas and mining are published, and discrepancies are reduced. Although the EITI Board and the International Secretariat are the custodians of the EITI process, implementation takes place at the country level, in a process that emphasises multi-stakeholder participation. www.eitransparency.org
Advancing the EITI in the Mining Sector A consultation with stakeholders
© EITI 2009 The views expressed in this publication are those of the authors and the contributors.
Edited by Christopher Eads, Paul Mitchell and Francisco Paris. Additional inputs were made by Jonas Moberg, Eddie Rich, Sam Bartlett and Tim Bittiger. Designed by Alison Beanland
Photography on the cover by Karl Schoemaker, courtesy of AngloGold Ashanti ADVANCINGTHE EITI IN THE MINING SECTOR A consultation with stakeholders CONTENTS
FOREWORD 5 AbOuT THIS publICATION 6
CONTEXT TO MINING AND THE EITI 1 THE buSINESS CASE FORTHE EITI 7 Edward Bickham 2 THE EITI AND THE MINING SECTOR TODAy 10 Francisco Paris and Sam Bartlett 3 THE STRuCTuRE OF THE GlObAl MINING SECTOR 21 Paul Mitchell 4 TAxATIONANDINVESTMENTISSuESINMINING 27 Paul Mitchell 5 MulTIlATERAl FINANCING TO THE MINING SECTOR AND THE EITI: the AfDb’s case 32 Christopher Wright 6 EITI – ONE OF MANy EFFORTS: Other initiatives for the extractive sector 39 Jonas Moberg, Juan Carlos Quiroz and Maaike Fleur CASE STUDIES 7 buIlDINGTRuSTTHROuGHTRANSpARENCyINpOST-CONFlICTDEMOCRATICREpublICOFCONGO 46 Kristian Lempa and Delphin Tshimena 8 REVIEWINGHAlFADECADEOFEITIIMplEMENTATIONINGHANA’SMININGSECTOR 50 David Nguyen-Thanh and Maya Schnell 9 TRANSpARENT buSINESS pRACTICES: ArcelorMittal’s participation in lIbERIA’s EITI (lEITI) 55 Steve John and Marcus Wleh 10 lEARNING-by-DOING: civil society engagement in mining in Mongolia 59 Dorjdari Namkhaijantsan 11 TAkING THE SpIRIT OF EITI TO THE Sub-NATIONAl lEVEl: the case of peru 64 Fernando Ruiz-Mier 12 TRANSpARENCy AT THE lOCAl lEVEl: the case of Cerrejón in the Guajira Region in Colombia 69 Alexandra Guáqueta 13 FACIlITATING CONSIDERATION OF THE EITI IN A lARGE COuNTRy: the case of Indonesia 75 David W. Brown and Chandra Kirana 14 A pRIVATE SECTOR pERSpECTIVE: debating adherence to the EITI in Zambia 80 Sixtus C. Mulenga 15 REVENuE REpORTING pRACTICES IN AuSTRAlIAN ExTRACTIVE SECTOR 83 Laura Missingham, Luke Bewley and Erica Ferguson 16 TRANSpARENCy IN DEVElOpED COuNTRIES: the Case of Canada 89 Natural Resources Canada GUIDANCE 17 pRACTICAlIMplEMENTATIONCHAllENGESFORMININGCOMpANIES 92 International Council on Mining and Metals (ICMM) 18 A MINING SupplEMENT TO “Drilling Down – The Civil Society Guide to Extractive Industry Revenues and the EITI” 100 Evelyn Dietsche and Elizabeth Bastida and the Revenue Watch Institute 19 ADVANCING THE EITI IN THE MINING SECTOR: Implementation Issues 112 Sefton Darby and Kristian Lempa8 ADVANCINGTHE EITI INTHE MINING SECTOR FOREWORD
1 out of the 2 EITI Candidate countries are mining countries and 23 out of 0 companies supporting the EITI are mining companies. Although the EITI methodology applies well to the mining sector, more can be done to refine the EITI process to improve implementation in the mining context. We in the EITI, together with many of our stakeholders, are pleased to present this publication. It is part of our efforts to further the understanding of the sector and respond to the mining-specific challenges for EITI implementation. Much can be learned through sharing experiences from early EITI implementation in mining countries and from discussing these issues with mining stakeholders. The mining sector is complex. Different taxation regimes, great diversity of minerals, diverse geology, numerous companies of varying size and often with greater local impact than oil and gas companies, among other specific issues, pose unique challenges when working to improve transparency in the revenue flows that the sector generates. The EITI has been well aware of these challenges since the beginning, when they were highlighted by the EITI International Advisory Group. Many people and organisations have contributed to this effort. We are much obliged to all contributors for their time and effort in producing this volume. We wish to acknowledge the support from paul Mitchell who chaired the consultative meetings and helped in editing this volume. We are grateful to a partial financial contribution by the International Council on Mining and Metals. We also wish to thank AngloGold Ashanti, ArcelorMittal, AusAID, Cerrejon, George Forrest International, International Finance Corporation and Newmont Mining Corporation, for providing us with photographs to illustrate the publication. Issues covered include taxation regimes, dealing with in-kind contributions, materiality, small scale mining, and sub-national flows. The case studies bring important lessons: implementing the initiative in post-conflict countries, ensuring stakeholder engagement including companies’commitment and civil society’s effective participation, the importance of stressing local involvement in the implementation and how transparency is addressed in developed countries. Three publications were launched in 2008 aimed at providing guidance to EITI practitioners: the World bank’s Implementing the Extractive Industries Transparency Initiative, the Revenue Watch Institute’s Drilling Down, and the EITI’s Business Guide. The last three chapters of this volume provide supplementary guidance tailored to mining contexts to match these three publications. The EITI has also continued to provide additional guidance in other relevant aspects to implementing the initiative. Concurrently with this publication we are launching Talking transparency: How to communicate the EITI, which will provide mining stakeholders with more guidance on the difficult task of communicating the complexities of this sector. The next 12 months are crucial for the first Candidate countries to complete the Validation process. All of us involved in producing this publication hope that it will be helpful in mineral-rich countries’efforts to implement the EITI and become EITI Compliant. The EITI International Secretariat looks forward to continuing collaboration with mining stakeholders to ensure the EITI becomes a global standard and useful tool for improving transparency in the extractive industries.
Jonas Moberg Head of the EITI International Secretariat
February 2009
ADVANCINGTHE EITI INTHE MINING SECTOR AbOuT THIS publICATION
The idea The production In 2006, the EITI International Advisory Group identified several production of this document was coordinated by Francisco paris challenges ahead for the EITI. paying more attention to the at the EITI International Secretariat.3 Opinions expressed in each specific context of the mining sector was among them.1 contribution reflect those of each author and not necessarily Following on this, when the EITI International Secretariat those of the EITI International Secretariat. This publication opened in Oslo in September 2007, addressing the mining does not constitute EITI formal policy and should be read as a context for the EITI was included in the 2008 Work plan.2 collection of viewpoints that enrich the debate about This publication is the first outcome of the consultative process transparency in the extractive sector and will inform further we began in order to further our understanding of the EITI refinements to the EITI model. within the context of the mining sector. Our purpose was to discuss mining-specific issues with photographs mining stakeholders, share lessons learned and identify possible photographs for chapters 3, 6 and 10 are courtesy of AngloGold refinements to the implementation of the EITI in a mining Ashanti, for Chapter 9 of ArcelorMittal, for Chapter 15 of AusAID, context. We invited over 20 stakeholders from companies, civil for Chapter 12 of Cerrejon, for Chapters 7,16 and 17 and society organisations and practitioners directly involved in EITI Introduction of George Forrest International, for Chapter 11 and implementation, to take part in informal discussions and to 18 of the International Finance Corporation, for Chapter 8 of collaborate in the production of this publication. This volume is Newmont. The rest of the pictures were taken by the EITI in a the outcome of this consultative process. visit to Ghana in February 2008.
The consultation process We held various teleconferences and met in Washington, DC on the margins of the IMF’s conference on mining taxation in September 2008. We agreed that this first consultation would result in a publication with three main parts: the mining context in which the EITI is implemented today, case studies from around the world and guidance to implementation. Although not exhaustive, this publication includes contributions from companies, civil society and practitioners at country level in Africa, Asia and in North and latin America and both EITI implementing, supporting and potential EITI countries. The sample of the EITI universe represented here is broad and we hope it encourages other organisations, countries and stakeholders to take part in the future about expanding and enhancing the EITI model.
1 See Section 3 of the Report of the EITI International Advisory Group published in September 2006
2 See Section 4.2. of the EITI Secretariat Workplan 2008
3 Jonas Moberg, Eddie Rich, Tim bittiger, Sam bartlett and Anders kråkenes provided useful input throughout the production of the volume.
ADVANCINGTHE EITI INTHE MINING SECTOR 1 THE buSINESS CASE FORTHE EITI
EDWARD BICKhAM
This chapter is neither as dispassionate nor analytical as some of What makes the extractive sector different? those which follow. Rather, it is a personal exposition of the case In the margins of the Johannesburg Summit, british Government for the EITI from the perspective of someone from the mining officials solicited Anglo American’s support for the planned industry who has been involved since its launch at the World announcement of the Initiative by prime Minister Tony blair. Summit on Sustainable Development in Johannesburg in 2002. One of the ripostes was that it was couched too negatively I served on the initial reference group of companies and NGOs around the potential pitfalls of resource development rather convened by the uk Department for International Development than emphasising their potential to promote growth and poverty as they sought to turn a concept into an international alleviation. Certainly, mining and oil and gas presents some multi-stakeholder initiative, and on the International Advisory specific challenges, but these industries are by no means unique Group that recommended how the EITI should be constituted in this respect. Thus, I continue to believe that the approach is as and governed, and then on the EITI board from 2006-9. valid for other sectors which either exploit a natural resource – During the last seven years the EITI has, through the goodwill like fishing or forestry – involve significant government and shared objectives of the unique coalition which supports it, procurements – such as infrastructure construction or the matured, gained strength and legitimacy, and become a de defence industries – or generate significant rents for facto international standard. It is too early to say whether it has governments – like mobile telephony or some utilities. effected a major change in the way in which resource revenues And although these other sectors were not initially in the frame, that are generated for the public purse are used – that may not it was important for mining companies to be seen to be taking be apparent for another three to five years. However, we can say our share of leadership in addressing problems within our sector. that the growing traction of the EITI has coincided with a period The extractive industries have a number of distinctive of high commodity prices in which, as far as we can see – as the features which make them controversial in the eyes of some cycle comes to an abrupt end – the manifestations of a“resource stakeholders and create specific challenges for companies curse”have been much less evident than in comparable periods seeking to build and maintain long-term businesses. in the past. These include: The key tests of whether the EITI is successful at a macro-level • mining companies’choice of where to invest is largely should be: whether the embezzlement of resource revenues by dictated by geology and the identification of economically corrupt elites has been halted or significantly reduced; and viable mineral deposits. Such deposits are decreasingly whether the multi-stakeholder discussion about the use to likely to be found in stable OECD and other developed which those revenues are put is contributing to greater trust, economies; consensus and, ultimately, social and economic development. • the development of mineral resources typically involves a
ADVANCINGTHE EITI INTHE MINING SECTOR lengthy period of exploration and project development outcomes is cause for us to be active in promoting practices involving a large up-front capital investment. Thereafter, that are most likely to lead to good outcomes. The such investments are immobile and assets are difficult to International Council on Mining and Metals, for example, dispose of for value where the seller is distressed or where has led a major research project, supported by the World political stability has significantly deteriorated; bank, uNCTAD and a number of NGOs, into how to ensure • mining companies exploit a publicly owned asset – part of that mineral wealth becomes an endowment rather than the national patrimony of our host countries – and the a curse. At the heart of its findings is that the most resource is non-renewable; fundamental factor is effective reform of a small number of • experience has shown that economies with a high key policies – macroeconomic, and land and contract law – dependence upon natural resources often face specific which all contribute to improved governance. Transparency macro-economic challenges related to, for example, the is not by itself a sufficient condition to guarantee success, volatility of commodity prices; there is a tendency for such but it is an important contributor to better governance. commodities to dominate export earnings and to increase Indeed, this is partly a matter of self-interest. It is more likely the host country’s exchange rate so as to reduce the that we will gain access to resources in the future if our competitiveness of other exports; industry is seen to make the lives of ordinary people better • in fragile states, a lack of identification with State and to contribute to the realisation of the Millennium institutions which may spark conflict can be exacerbated if Development Goals. warring factions are able to access resource revenues to Thus, going back to 2002, when at short notice the Anglo fund their campaigns; and American Executive Committee was asked to give its • the large social and environmental footprint of extractive endorsement of the fledgling Initiative, it was prepared to give operations can lead to adverse outcomes for local people it. The counter argument broadly went that in those countries unless these impacts are actively mitigated through good that choose to identify individual company contributions rather environmental stewardship and measures to equip people than to aggregate them, and where the political environment for jobs or to increase linkages into the local economy. tends towards the populist, there is a danger of a poorly These factors lead to five conclusions. informed debate comparing the tax paid by different operations • First, that the long-term nature of the investment and the without understanding the finer points of geology, fiscal public ownership of the underlying resource make it rules, or payback periods. This, it was feared, could lead to a inevitable that mining companies must take an active competitive bidding up of tax burdens. Conversely, the winning interest in governance issues. argument was that as long-term investors we benefit from • Second, most leading mining companies are engaged stable regimes and good governance, and that the risks around their operations in seeking to maximise their involved in supporting this objective through the EITI were development contribution. However, the impact of such not disproportionate to the potential gain. Moreover, our measures will be greatly reduced if there is little trust experience is that in many countries the public significantly between the company and local stakeholders, or if the underestimate the amount of tax which mining companies pay. government is essentially predatory in its use of revenues. Thus, when the time came for Mr blair to make his speech, • Third, one of the biggest contributions that most mines will Anglo, Rio Tinto and bHp billiton were all lined up to give the make to sustainable development – through building social, idea their backing. human and manufactured capital while extracting a Regrettably, not all the governmental diplomatic niceties non-renewable resource – will be through paying tax. were followed. The fact that the South African Government, If taxes and royalties are not properly accounted for or as conference hosts, felt themselves to have been partially invested wisely, then the relevant country or region may blind-sided by the announcement caused an impression of an miss out on a unique opportunity to spark wider initial lack of “Southern”ownership. This has led to a discourse in development through inward investment. some Southern African countries that the EITI is“neo-imperialist”. • Fourth, societal expectations of corporate behaviour have The riposte to this critique has been some time in coming, but is become increasingly expansive. While we cannot easily be manifest in the fact that it has been endorsed by the G20 and held accountable for how our host governments spend the has now been recognised in a uN General Assembly resolution. revenues that we generate, many people will expect us to Norway is now leading the way among“Northern”resource-rich play a part in making the misappropriation of such revenues countries in joining the ranks of would-be implementers. as difficult as possible. • Finally, the fact that we know that mining can create great What has made the EITI distinctive? benefits for host countries – as has been shown by countries undoubtedly, progress has been much slower than any like botswana or Chile – or contribute to poor development of us imagined in 2002. That is in large part because we
ADVANCINGTHE EITI INTHE MINING SECTOR underestimated the scale of the task and the complexity of would-be implementers were oil-rich states, Nigeria and aligning systems and stakeholders at a national level. building Azerbaijan. structures that command trust in countries where trust is However, through the efforts of companies and civil society in short supply takes time – as the peruvian experience, in groups and the holding of workshops aimed at the mining particular, has shown. Moreover, at the international level it has sector, this situation has been largely turned around. Among taken time to move from implementing principles to a workflow the major mining jurisdictions where the EITI is now being that can be consistently validated country by country. by early implemented are Ghana, Guinea, the Democratic Republic of 2010 we will be able to judge how many Candidate Countries Congo, liberia, the kyrgyz Republic, Mauritania, Mongolia, will have completed their implementation programmes and be peru, and Sierra leone. Others who have expressed substantive ready for full Validation. interest in the potential of the process include botswana, I would highlight two aspects of the EITI’s approach for Indonesia, Zambia, Tanzania and Colombia. would-be participants. First, although the Initiative brings Mining is also distinct from oil and gas in that our local together a diverse group of stakeholders at the international impacts – for good or ill – tend to be more concentrated. level – participating governments, supporting countries, NGOs, Thus, those stakeholders with an interest in mining have been oil companies, mining companies and investors – what has particularly keen to understand how the principles of been striking is the very constructive nature of the international transparency might be extended to a sub-national level. engagement. people and organisations come to the Initiative This is particularly the case where some countries have laws – from very different directions, and yet the EITI is an example of or constitutional provisions – whereby a proportion of mining what can be done to build consensus around carefully targeted revenues is supposed to be returned to the producing regions. objectives. Often, because of a lack of transparency, people in the region do Moreover, some companies are uneasy about an active not know whether any taxes or royalties have actually reached involvement in debate around governance and public policy the national capital, or, if they have, what happened to them at issues; and some reticence in this respect is justified. We do not that point and how they were spent, or, if they were returned, have a mandate or necessarily the legitimacy to define what to whom and for what purpose they have been earmarked. constitutes good governance. We can, however, more easily Sub-national flows are one of the EITI’s international work contribute in these areas as part of a multi-stakeholder process. streams and the World bank is helpfully working to produce a Second, an important element of the EITI’s relative success is suitable mining reporting template. Sub-national flows have that, while there is an overarching set of international principles, already been established, inter alia, as a particular point of the model for implementation is nationally led and owned – concern in peru, the DRC and Ghana. There remains, however, allowing national level stakeholders to adapt the process some further work to be done. according to local needs and priorities. The in-country focus is also a key difference between the EITI and the publish What What does success look like? you pay approach. The former is able to compare payments Revenue transparency is increasingly becoming a significant in-country directly with what the host government claims sustainable development issue for the mining sector. The EITI is to have received and to investigate the reasons for any not a silver bullet which will end corruption and solve all the discrepancies. The latter may find ways of getting companies to problems of resource revenue management. Rather, on the disgorge details of their payments internationally, but without basis of still early evidence, it is proving to be a useful the support of an in-country process for examining the figures it contribution to making corruption more difficult and to is of less practical value. I should mention in this respect that, in improving accountability. From the perspective of mining common with Rio Tinto, Anglo American voluntarily declares our companies, the Initiative presents an opportunity for us to tax payments by country for the dozen or so most important contribute to better governance, to explain the contribution countries where we operate, in our annual“Report to Society”. we make to our host countries’finances, and to build trust through greater openness – especially if transparency around The EITI’s relevance to the mining sector sub-national flows gains traction. Opening the books is a step The most infamous examples of the large-scale embezzlement forward in itself, but the real gains are most likely to come of resource revenues by corrupt elites have been in the oil and through the dialogue that EITI implementation processes create gas sector. Moreover, because the revenues generated by oil around sustainable development and the proper use of mining and gas tend to be significantly larger than for mining, the revenues. economic management aspects of the“resource curse”have tended to be greater in that sector. Thus, much of the media and political commentary around the launch of the EITI focused Edward Bickham is the Executive Vice President of External Affairs for solely on oil and gas. In addition, the two most prominent Anglo American plc and Member of the EITI International Board.
ADVANCINGTHE EITI INTHE MINING SECTOR 2 THE EITI ANDTHE MINING SECTORTODAy
FRANCISCo PARIS and SAM BARTLETT
Executive summary The mining sector is well represented in the EITI: fourteen out of the 2 EITI“Candidate Countries”are mining countries and % of EITI supporting companies are from the mining industry. There has been a general perception that the EITI is intended mainly for the oil and gas sectors. This chapter, however, illustrates how the EITI methodology can be applied as easily to the mining sector. Many of the activities in the mining sector can be covered by the current formal structure of the Initiative. Other chapters in this publication will address issues that are specific to the mining sector and offer suggestions on how the EITI model could be further refined.
The mining sector is well represented in the EITI: fourteen out of Candidate Countries, 14 of them have reported or will be the 24 EITI“Candidate Countries”are mining countries and 58% reporting on mining sector revenues. Relative to the overall of EITI supporting companies are from the mining industry. number of resource-rich countries, there is now proportionately There has been a general perception that the EITI is intended much greater adherence to the EITI in mineral-rich countries mainly for the oil and gas sectors. This chapter, however, than in oil and gas rich countries. illustrates how the EITI methodology can be applied as easily to The core characteristics that define the EITI are that the the mining sector. Many of the activities in the mining sector can Initiative is voluntary, based on the collaboration of three main be covered by the current formal structure of the Initiative. Other stakeholders (governments, companies and civil society) and chapters in this publication will address issues that are specific focused on the disclosure of revenues accrued to governments to the mining sector and offer suggestions on how the EITI as a result of the exploitation of mineral resources. model could be further refined. As was shown in the previous chapter, the Initiative has followed extensive piloting, consultation and careful elaboration Introduction of a methodology in order to incorporate two basic aspects: the In the earlier years of the EITI’s existence as an initiative, there need for flexibility in their execution in response to the varied was some perception that it was not“proceeding well”in mining conditions in which mining occur, and the need to maintain countries. This was in part due to the fact that early progress was credible, rigorous and sustainable standards in the made in oil and gas countries leading the development of the implementation of the Initiative. EITI (such as Azerbaijan and Nigeria), while progress in mining This methodology is summarised in the Validation Grid and countries such as Ghana, the kyrgyz Republic and peru was thoroughly explained in the Validation Guide. This basic set of initially slow. That picture has now changed. Of the 24 EITI rules emphasises the broader crucial conditions in which an EITI
10 ADVANCINGTHE EITI INTHE MINING SECTOR process should take place and the key outcomes that should countries. This stark contrast between the fiscal impacts of the be produced. These conditions are the sustained commitment mining sector and the hydrocarbons sector largely explains and active participation of all three main stakeholders the perception that mining is less important than oil and gas. (i.e. continuous political and technical support from However, as global demand for raw materials continues to governments, active collaboration from companies and increase, revenues generated by the sector are likely to increase active involvement of civil society along the process). (corrected by the level of commodities prices). Additionally, new The key outcomes of an EITI process are the disclosure or expanded operations in countries with untapped resources of companies’payments and government’s receipts, their will increase the number of countries with mining operations. reconciliation, and the dissemination of these data. These minimum requirements are the stamp of an EITI process and Does this difference in overall economic impact mean make no distinction between the types of mineral resources that mineral-rich countries are less exposed to the being extracted. The EITI allows ample room for adapting each “resource curse”or other negative developmental country’s resources profile and economic, social and political outcomes? conditions to the EITI process. Countries vary in their tax The smaller impact of the mining sector on fiscal and export regimes, stages in the production cycle, portfolio of exploitable revenues in mineral-rich countries compared to their resources and the geological and more technical characteristics hydrocarbon-rich counterparts does not imply that these of their extractive sector’s reserves, as it is shown in the next countries are not significantly affected by mining industry chapter. activities. According to a joint World bank, uNCTAD and ICMM An improved understanding and a clear description and paper, “the idea that mineral resources constitute a curse has revelation of the revenues generated by the extractive industry gained prominence in policy debates”.2 It is recognised, as well, is central to the EITI process, both in the mining and in the that initiatives such as the EITI “have induced greater transparency hydrocarbon context. The rest of this chapter discusses some in revenue flows and highlighted the need to improve the public aspects of the economics of the mining sector. This brief review financial management of resource rents”.3 is followed by a description of how the EITI has performed so far The impact of the mining sector is often greater and more in mining countries and with respect to mining companies. focused on the local communities and regions where mineral It also highlights how EITI Validation, the“quality control” resources are located. Issues such as sub-national flows and mechanism of the Initiative, equally serves countries with direct contribution to local communities (i.e. in-kind or non-cash different natural resource portfolios. Finally, it examines the payments) become more salient in mining countries. In addition, future direction of the Initiative in light of this broader the reduced fiscal contribution of mining is due to the lower discussion. profit margins and volumes related to mining when compared to oil. In some countries, artisanal mining output is small and The economic significance of the mining sector and the does not appear in official statistics. These are important and “resource curse” distinctive issues on which the EITI could refine their guidelines. The degree to which the economies of resource-rich countries The EITI provides a platform for addressing these particular depend on their extractive sector varies immensely. When issues as well as the core question of revenue disclosure. the exploitation of natural resources is put into context with Subsequent chapters touch upon these matters. As the EITI the rest of the economy, one can observe that the impact of the process is implemented in more mining countries, and extractive sector can be very different in each case. In most Candidate Countries go through more iterations of EITI hydrocarbon-rich countries the oil and gas industry dominates reporting, valuable empirical evidence will supplement the the export sector of the economy. Nearly half of the hydrocarbon- ideas debated here and inform further refinements of the rich countries listed by the IMF1 depend on oil and gas for more EITI methodology. than 80% of their exports; the average of all listed hydrocarbon- rich countries is 71%. In addition, these governments are fiscally EITI Validation dependent on the extractive sector, as earnings from the oil and Validation has two critical functions. First, it promotes dialogue gas sectors account for an average 55% of fiscal revenues. and learning at the country level. Second, it safeguards the EITI The situation in mining countries is similar. Mining exports brand by holding all EITI implementing countries to the same average almost 50% of total exports in many mineral-rich global standard. countries, highlighting the fact that these economies tend to be Validation is not an audit. It does not repeat the disclosure dominated by their resources. However, the contribution of the and reconciliation work that is carried out to produce EITI mining sector to fiscal revenues is much smaller than in reports. Validation has broader objectives: it evaluates EITI hydrocarbon-rich countries: revenues from the mining industry implementation in consultation with stakeholders, it verifies average just 12.8% of total fiscal revenues in mineral-rich achievements with reference to the EITI global standard, and it
ADVANCINGTHE EITI INTHE MINING SECTOR 11 Table 1. Hydrocarbon-rich countries, 2000-0 1/ 2/
Countries Average annual hydrocarbon Average annual hydrocarbon Energy Oil proved Gas proved G are EITI Candidate revenues 2000-0 exports (goods) 2000-0 depletion reserves reserves Countries 200 4/ (200) 5/ (200) 5/
In % of In % of In % of In % of In % of In % of In % of total fiscal GDp total exports GDp Gross National world world revenue 3/ (goods) Income reserves reserves
Algeria* 70.5 26.3 97.6 36.8 35.2 0.99 2.54 Angola 79.8 33.4 91.8 68.0 45.0 0.76 … Azerbaijan*G 33.3 8.5 87.3 36.1 54.6 0.59 0.77 bahrain 71.3 23.2 74.4 53.7 35.7 … 0.05 brunei Darussalam 87.7 40.5 90.1 58.6 … 0.09 0.19 Cameroon*G 27.7 4.8 44.7 8.3 10.8 ...... Colombia* 10.0 3.0 26.7 4.4 7.2 0.12 0.07 Congo, Republic of G 69.6 22.2 88.3 68.7 54.1 0.15 … Ecuador 26.0 6.6 46.9 11.8 19.0 0.42 … Equatorial Guinea*G 85.2 24.4 96.8 93.1 … 0.15 … Gabon*G 60.1 19.2 81.7 47.5 25.5 0.18 … Indonesia* 30.3 5.5 22.8 7.3 9.4 0.36 1.55 Iran* 65.5 14.7 82.2 24.2 36.0 11.12 14.94 Iraq/6 79.2 69.5 97.0 69.4 … 9.63 1.77 kazakhstan*G 25.1 6.3 52.6 24.1 39.9 3.32 1.68 kuwait 74.7 46.1 92.2 45.1 46.8 8.50 0.88 libya 80.2 43.2 97.1 53.6 60.7 3.28 0.83 Mexico* 33.3 7.5 17.2 3.0 7.4 1.24 0.23 Nigeria G 78.9 32.3 97.2 46.2 49.1 3.00 2.92 Norway 24.0 13.0 60.0 19.8 10.9 0.81 1.33 Oman 83.4 38.6 80.9 45.3 58.8 0.47 0.56 Qatar 68.4 26.0 78.5 46.8 … 1.27 14.40 Russia* 19.5 7.3 54.0 17.9 29.7 6.07 26.70 Saudi Arabia 83.1 31.3 88.8 39.8 50.1 22.13 3.82 Sudan 49.8 8.3 80.6 12.9 15.1 0.54 … Syria 46.3 12.8 70.2 24.6 38.6 0.26 0.17 Trinidad and Tobago 36.4 9.3 59.9 28.4 46.2 0.07 0.30 Turkmenistan 43.2 8.7 83.5 28.7 … 0.05 1.62 united Arab Emirates 66.1 19.7 42.4 32.6 29.2 8.19 3.39 uzbekistan …… …… 59.3 0.05 1.04 Venezuela 48.8 15.8 82.5 25.8 34.7 6.68 2.39 Vietnam 31.2 7.4 21.3 11.0 9.5 0.26 0.13 yemen G 71.5 24.9 88.1 32.7 44.2 0.24 0.27 Average 55.0 20.6 71.1 35.2 34.4 2.93 3.25
Countries with potentially large medium-and long-term hydrocarbon revenue bolivia 20.9 5.6 23.0 5.0 15.4 … 0.42 Chad 8/ 31.0 3.8 80.8 42.9 79.1 0.08 … Mauritania*G …… …… … …… Sao Tome and principe 7/ G 57.7 73.4 ………… Timor-leste G 63.8 38.8 72.1 26.0 ………
Sources: Executive Board documents, WEO database, and IMF staff estimates; World Bank Development Indicators.
1/ For countries with an asterisk (*), a fiscal Report on the observance of Standards and Codes (RoSC) has been published by the IMF. 2/ Table 1 includes all countries that are considered rich in hydrocarbons resources on the basis of the following criteria: (i) an average share of hydrocarbon-generated revenues of at least 25% of total fiscal revenues during the period 2000-2005, or (ii) hydrocarbon exports account for at least 25% of total exports in the period 2000-2005. 3/ Revenues including grants. 4/ World Bank Development Indicators definition. Energy depletion is equal to the product of unit resource rents and the physical quantities of energy extracted. It covers coal, crude oil, and natural gas. 5/ Source: British Petroleum Statistics, June 2006. 6/ Fiscal information available for 2004-2005. 7/ Information available for 2005. 8/ Information available for 2004-2005.
12 ADVANCINGTHE EITI INTHE MINING SECTOR Table 2. Mineral-rich countries, 2000-0 1/ 2/
Countries Average annual mineral Average annual mineral Mineral depletion G are EITI Candidate revenues 2000-0 exports 2000-0 200 4/ Countries In % of In % of In % of In % of In % of Gross National Mineral total fiscal GDp total exports GDp Income revenue 3/ (goods) botswana Diamonds 62.5 20.6 79.5 … 32.3 Chile* Copper 9.4 2.2 39.1 11.7 10.8 Dem. Republic of Congo G Diamonds …… 52.7 11.9 … Ghana* G Gold …… 33.4 11.0 0.2 Guinea G bauxite/alumina 17.8 2.4 87.7 19.0 1.9 Indonesia* Tin, copper, gold, silver …… 7.3 2.3 1.6 Jordan* phosphates, potash 0.7 0.2 12.4 3.5 0.1 kyrgyz Republic* G Gold 1.7 0.3 39.1 12.5 … liberia G Diamonds …… … … … Mauritania G Iron ore …… 53.4 16.2 10.9 Mongolia* G Copper, gold 8.2 2.9 51.2 26.3 8.4 Namibia Diamonds 5.9 1.9 59.9 … 20.0 peru* G Gold, copper, silver 3.3 1.5 50.8 8.1 2.1 papua New Guinea* Gold 17.9 5.6 77.6 47.9 25.1 Sierra leone G Diamonds, bauxite, rutile 0.9 0.2 87.0 10.1 … South Africa Gold, platinum, coal …… 27.2 6.4 0.6 uzbekistan Gold …… 29.8 8.6 … Zambia Copper …… 60.5 16.6 3.7 Average 12.8 3.8 49.9 15.6 6.0
1/ For countries with an asterisk (*), a fiscal Report on the observance of Standards and Codes (RoSC) has been published by the IMF. 2/ Table 2 includes countries that are considered rich in mineral resources on the basis of the following criteria: (i) an average share of mining-generated revenues of at least 25% of total fiscal revenues during the period 2000-2005, or (ii) mineral exports account for at least 25% of total exports in the period 2000-2005. Two countries (Indonesia and Jordan) do not meet the data criteria to be in the list but are included due to the relevant importance of minerals in their economies. Indonesia, Mauritania and Uzbekistan also have substantial hydrocarbon resources. 3/ Revenues including grants. 4/ World Bank Development Indicators definition. Mineral depletion is equal to the product of unit resource rents and the physical quantities of minerals extracted. It refers to tin, gold, lead, zinc, iron, copper, nickel, silver, bauxite and phosphate.
identifies opportunities to strengthen the EITI process going Assessing compliance via the Validation Grid forward. The EITI board uses Validation reports to determine a The Validator meets with the multi-stakeholder group, the country’s Candidate or Compliant status. organisation contracted to reconcile the figures disclosed by Candidate Countries are required to complete Validation companies and the government and other key stakeholders within two years. Countries that demonstrate their compliance (including companies and civil society not on the with the EITI (or demonstrate substantive progress towards multi-stakeholder group). achieving this goal) will receive international recognition for At the heart of the process is the EITI Validation Grid.4 It their efforts and achievements. If Validation is not completed, or comprises 20 indicators: 18 which should be assessed as met or if the Validation shows that there has been no meaningful unmet, and two that are addressed in the Validator’s narrative progress towards achieving EITI compliance, the EITI board will report. The indicators are linked to the EITI Criteria. The Validator revoke that country’s Candidate status. Validation thereby assesses EITI compliance in consultation with all the key ensures that free riders do not undermine the EITI. stakeholders, taking into account prevailing circumstances and The Validation process is undertaken at the country level, challenges. To guide the Validator, the Validation Guide includes overseen by the multi-stakeholder Group. The implementing a series of Indicator Assessment Tools (IATs). The IATs provide country appoints, procures and pays for the Validation. This additional guidance to the Validator in situations where the ensures that there is strong implementing country ownership of indicator is more complex or subjective. the process. At the same time, the EITI board requires that the The Validator’s report is then submitted to the national work is carried out by one of seven accredited firms. These firms government, the multi-stakeholder Group, and the EITI board were selected by the board via a competitive international for approval. If there is disagreement regarding the Validation bidding process. This approach ensures that the work is carried process, it is dealt with in the first instance locally, with the EITI out to a consistently high standard across all countries. board only called in to help in cases of serious dispute.
ADVANCINGTHE EITI INTHE MINING SECTOR 13 Validation in the mining sector implementation of the EITI. There is ample opportunity for To date, no country has completed the Validation process. stakeholders to comment on industry-specific challenges The EITI board agreed the procedures for procuring a Validator in and opportunities. Validation therefore promises to make an March 2008. It subsequently established a Validation deadline important contribution to ensuring that the EITI has an enduring for the first 22 Candidate Countries of 9 March 2010. The impact in implementing countries. deadline for new Candidate Countries is set two years from the date on which they attain Candidacy. Two Candidate Countries – EITI mining countries Azerbaijan and liberia – have formally initiated the Validation EITI Candidate Countries whose extractive industries include process with a view to completing the process in the first quarter mining or both mining and oil and gas are: the Central African of 2009. Republic, the Democratic Republic of Congo, Gabon, Ghana, The Validation process and the Validation Grid have been Guinea, kyrgyzstan, liberia, Madagascar, Mali, Mauritania, designed so that they can be applied in both the mining and Mongolia, Niger, peru and Sierra leone. the oil and gas sectors. There are no mining-specific indicators Six (out of ten) of these countries have produced one or and obligations, nor any requirements specific to oil and gas. more EITI report; these are discussed in the following section. While the Validation indicators are clearly linked with the EITI liberia is close to producing its first report and is preparing criteria, the framework is flexible enough to accommodate for subsequent Validation. Mongolia has undergone a different EITI programmes. For example, the process is equally self-assessment exercise in its preparation for Validation as well.5 applicable to countries with disaggregated (revenue and peru is also preparing its first report and has also piloted the payment figures are broken down) or aggregated (revenue and application of EITI principles at municipal level (as Chapter 11 payment figures are presented as one figure). The Validation illustrates), while other countries, such as Zambia and Indonesia, does not assess the merits of these two approaches – it focuses have gone through recent consultations among stakeholders on on the consultative process which stakeholders undertook to joining the EITI. The case studies section includes chapters on agree on the approach adopted. The same applies to other these two interesting countries. aspects of disclosure, reconciliation and reporting, such as Traditional mining-developed countries, such as Australia and establishing what is a material payment, agreeing which Canada, are supporters of the EITI. Their experiences in dealing organisation will reconcile the figures, and so forth. with vast mining sectors are valuable to the Initiative. They not In addition to the completed Validation Grid, the Validator’s only contribute financially to the Multi-Donor Trust Fund final report will also include: i) a short narrative report on administered by the World bank (which provides extensive progress against the country work plan, ii) a narrative report on technical assistance in mining countries) but stand ready to company implementation, and iii) an overall assessment of the share their experience with other mining countries. The case implementation of the EITI. The Validation report will also studies on Australia and Canada in this publication illustrate contain lessons learned, document concerns expressed by these contributions. stakeholders, and make recommendations for future
G The Central African Republic, the Democratic Republic of Congo, Gabon, Ghana, Guinea, kyrgyzstan, liberia, Madagascar, Mali, Mauritania, Mongolia, Niger, peru and Sierra leone
1 ADVANCINGTHE EITI INTHE MINING SECTOR EITI MINING COUNTRIES Country EITI status Mining industry Production’s highlights based on the USGS Mineral Survey6
Central African Candidate: production of gold and diamond was estimated in about 420,000 carats in 2006 and 383,294 carats in Republic November 2008 2005. Mineral resource endowment includes copper, diamond, gold, graphite, ilmenite, iron ore, kaolin, Validation by: kyanite, lignite, limestone, manganese, monazite, quartz, rutile, salt, tin, and uranium. 20 Nov 2010
Democratic Candidate: production: cobalt, columbium (niobium) and tantalum, copper, germanium, gold, tin, and zinc ores, and Republic of Congo February 2008 small amounts of steel and refined cobalt. The country also produced cement, crushed stone, diamond Validation by: and coloured gemstones, coal, and crude petroleum. The mining sector accounted for 10% of the GDp. 9 Mar 2010
Gabon Candidate: 2007 Gabon’s mineral industry was dominated by crude petroleum and manganese production. Other Validation by: non-fuel mineral commodities included cement, diamond, and gold. undeveloped resources included 9 Mar 2010 iron ore, niobium (columbium), and phosphate rock. In 2006 it produced 3,000 thousands metric tons of manganese (third among the world’s leading producers).
Ghana Candidate: 2007 production of bauxite was 607,000 and 842,000 metric tons in 2005 and 2006 respectively. In 2006, Validation by: diamond and silver production was 973,000 carats and 3,142 kilograms respectively, and gold 9 Mar 2010 production was 66,205 kilograms.
Guinea Candidate: 2007 Guinea was among the world’s leading producers of bauxite, ranking fourth after Australia, brazil, and Validation by: China. In 2006, production of calcined bauxite was 567,000 metric tons, and 730,000 t in 2005. Other 9 Mar 2010 commodities produced in the country were cement, diamond, gold, and salt. undeveloped mineral resources included graphite, iron ore, limestone, manganese, nickel, and uranium kyrgyzstan Candidate: 2007 It produces molybdenum, refined gold, and uranium. kara-balta had produced about 450 t/yr of u3O8 Validation by: from uranium concentrate (provided by the Stepnoye and the Tsentralnoye Mining Directorates in 9 Mar 2010 kazakhstan). As of December 31 2005, proven and probable reserves at the kumtor gold deposit were reported by Centerra Gold to be 154 t. liberia Candidate: liberia produced in 2006 154,990 metric tons of cement, 220,000 metric tons of sand and 6,000 metric September 2007 tons of crushed stone. In 2002 it was estimated it produced 80,000 carats of diamonds. The New liberty Validation by: Mine was estimated to have about 13.5 million metric tons of gold. In 2005, Mittal Steal (now Arcelor 9 Mar 2010 Mittal) signed an agreement for the mining of about 1 billion metric tons of iron ore.
Madagascar Candidate: Madagascar produces gemstones and graphite (in 2006, Madagascar was the world’s top-ranked February 2008 sapphire producer). Other domestically significant minerals produced included chromite and ornamental Validation by: stones. In recent years, the production of chromite, labradorite, and salt have increased sharply. 9 Mar 2010
Mali Candidate: Mali produced 51,957 and 44,230 kg of gold in 2006 and 2005 respectively. No other mineral 10 Mar 2008 commodities were produced in significant quantities in the country with the exception of diamond, rock Validation by: salt, and semiprecious stones, such as amethyst, epidote, garnet, prehnite, and quartz. The government 9 Mar 2010 estimated the total artisanal production of semiprecious stones to be about 10,000 metric tons per year.
Mauritania Candidate: 2007 Mauritania’s mineral sector was dominated by iron ore mining and beneficiation. Other commodities Validation by: produced included cement, gypsum, and salt. The country produced 10,600 thousands metric tons of 9 Mar 2010 Iron ore in 2003.
Mongolia Candidate: 2007 Mongolia’s mineral resources include coal, copper, fluorspar, gold, iron, lead, molybdenum, silver, Validation by: tungsten, uranium, and zinc. production of cement, coal, and petroleum was mostly for domestic 9 Mar 2010 consumption. Owing to increased foreign direct investment, production of coal, gold, petroleum, and zinc has gradually increased during the past several years.
Niger Candidate: Mineral commodities include cement, coal, gold, gypsum, limestone, salt, silver, tin, and uranium. In September 2007 2006, Niger was the world’s fourth-ranked producer of uranium, produced by Areva NC, bayswater Validation by: uranium Corp – a group of companies led by China National uranium Corp – and North Atlantic 9 Mar 2010 Resources ltd. peru Candidate: 2007 peru is a top producer of arsenic trioxide, bismuth, copper, gold, lead, molybdenum, rhenium, silver, tin, Validation by: and zinc. In 2006, the value of peruvian minerals (metals, industrial minerals, and fuels) production 9 Mar 2010 amounted to uS$6.5 billion. It also has vast reservoirs of natural gas. Mineral outputs increased from 2005 to 2006, due mainly to natural gas (77%), molybdenum (22%), gold (20%), crude oil (18%), and iron (8%).
Sierra leone Candidate: Diamond is the most significant mineral commodity, although its production was severely affected by February 2008 the violent conflicts of recent years. Other mineral commodities produced in the country included Validation by: bauxite, cement, gold, gypsum, ilmenite, and rutile. 9 Mar 2010
ADVANCINGTHE EITI INTHE MINING SECTOR 1 EITI reports from mining countries These reports reveal how countries dealt with issues such as To date, six EITI Candidate mining countries have issued one aggregation or disaggregation of data, scoping in terms of type report or more. These are: Gabon, Ghana, Guinea, kyrgyzstan, of revenues to include in the reports, level of materiality for Mauritania and Mongolia. A review of these reports shows that payments, naming companies not participating in the reporting, the EITI is a nationally driven effort. The flexibility embedded in auditing or reconciliation of the figures, and discrepancies and the EITI allows countries to adapt their EITI processes to their additions to the basic disclosure established in the EITI local conditions and possibilities. The reports support the methodology, such as in the case of Ghana, that included the “national ownership”assertion that is a primary guideline to the utilisation of revenues at local level (District Assemblies). work of the International Secretariat.
REPORTS Country Highlights
Gabon • Data presented in aggregated form for the year 2006 First Report: 2004 • Cover both petroleum and mining sector http://www.geiti.gov.gh/downloads/first_aggrega • prepared by Ernst & young (E&y), paris tor_report.pdff • 10 mining companies reported (and 13 didn’t participate in the mining reporting). E&y was satisfied that the last Report: 2006 main companies participated in the report. http://www.eitigabon.org/Fr/pdf/Rapport_EITI_ • Six different types of taxes and fees were included (royalties, corporate tax, dividends, mining duties, and Gabon_2006_au_20_mars_2008.pdf extraction and surface fees) • No discrepancies were found
Ghana • Data presented in aggregated form for the years 2004 and 2005 First Report: 2004 (published in 2007) • prepared by boas & Associates, Accra http://www.geiti.gov.gh/downloads/first_aggrega • High levels of materiality (i.e. companies reporting account for a very significant share of the total) tor_report.pdf • Aggregator performed both process and financial audit last Report: 2005 (published in 2008) • Six different types of fiscal revenues were included (mineral right licenses, mineral royalties, ground rent, http://www.geiti.gov.gh/downloads/second_aggr property rate, corporate rate and dividends). Voluntary contributions were considered. egated_report_final.docdf • Some discrepancies were found • Report included utilisation of revenues by District Assemblies
Guinea • Data presented in aggregated form for the year 2005 First Report: 2005 (published in 2007) • prepared by kpMG, paris http://www.guinee.gov.gn/itieg.php • Six companies reported • Five different types of fiscal revenues were included (mining taxes, income tax, property tax, local taxes and import taxes). Extraordinary revenues were considered. • Some discrepancies were found but deemed immaterial • production figures by companies were included
kyrgyzstan • Data presented in aggregated form for the year 2004 (first half), corresponding only to company payments First Report: 2004 • 12 different types of fiscal revenues were included (profit tax, property tax, custom duty, mineral resource tax, http://www.minfin.kg/publications/IPPDDo.htm concession, royalties, dividends, license/permit fees, rent and lease, sale of equity, interest, contributions to social fund). Extraordinary revenues were considered
Mauritania • Data presented in aggregated form for the years 2005 and 2006 First Report: 2005 • Cover both petroleum and mining sector http://www.cnitie.mr/article.php?categ=37&PhPS • prepared by Ernst & young (E&y), paris ESSID=a458beb2689dd3188fff05f68ad06014 • Seven mining companies reported (and 12 didn’t participate in the mining reporting) in 2005. In 2006, 17 last Report: 2006 companies reported and only four did not participate http://www.cnitie.mr/article.php?categ=37&PhPS • Four different types of fiscal revenues were included (remuneration fee, annual fee, single annual fee, dividends) ESSID=a458beb2689dd3188fff05f68ad0601 • Some discrepancies were found but deemed immaterial
Mongolia • Data presented in disaggregated form the year 2006 (aggregate payments for 2007) First Report: 2006 • prepared by Crane White & Associates http://eitimongolia.mn/modules/download/files/ • level for material payments was set (200 million tugriks). The 25 of the largest mining companies met that 20080218-042734_file.pdf criterion last Report: 2006 • The reconciliation was not a traditional financial audit http://eitimongolia.mn/modules/download/files/ • Six different types of fiscal revenues were included (taxes, fees, charges, dividends, payments and donations). 20080627-031346_file.pdf • Significant discrepancies were found • Voluntary payments (donations) were reported
1 ADVANCINGTHE EITI INTHE MINING SECTOR EITI mining companies organisations of the EITI and its president has been a member The International Council on Mining and Metals (ICMM), the of the EITI International board since its inception in 2006. industry association that represents most of the leading The following table shows the mining companies that currently companies in the sector, is one of the most active partner support the EITI.
EITI MINING COMPANIES EITI- Home country EITI Selected countries in which the company operates: Supporting rank (1) Resource-rich countries (according to the IMF) Company* (2) Other countries
Alcoa uS 7 (1) Ghana, Guinea, Trinidad and Tobago, Venezuela (2) Australia, brazil, Canada, Denmark, Jamaica ,Iceland, Italy, Norway, Spain, Suriname
Anglo-American uk 4 (1) Angola, botswana, Chile, Colombia, DRC, Mexico, Namibia, peru, Russia, South Africa, uAE, Venezuela (2) Australia, brazil, Canada, China, Czech Republic, France, Germany, India, Ireland, luxembourg, philippines, poland, Romania, Spain, Tanzania, uS, Zimbabwe
AngloGold South Africa 33 (1) Colombia, DRC, Ghana, Guinea ,Mali, Namibia, Russia, (2) Argentina, Australia, brazil, laos, philippines, Tanzania, uS
Areva France 11 (1) Chile, Indonesia, Namibia, South Africa, Colombia, kazakhstan, Mexico, Sudan, uAE, Venezuela (2) Argentina, Australia, Austria, belgium, brazil, Canada, Central African Rep, China, Egypt, Germany, Greece, Hungary, India, Italy, Ivory Cost, Japan, Malaysia, Netherlands, Niger, Norway, pakistan, poland, Russia, Singapore, South korea, Spain, Sweden, Switzerland, Slovakia, Thailand, Turkey, uk, uS
Barrick Gold Canada 25 (1) Chile, peru, papua New Guinea, Russia, South Africa (2) Argentina, Australia, Canada, Dominican Rep, pakistan, Tanzania, uS
BHP Billiton Australia 3 (1) Algeria, Angola, Chile, Colombia, Guinea, Indonesia, Iraq, peru, papua New Guinea, South Africa, Trinidad and Tobago (2) brazil, Canada, China, Mozambique, pakistan, Suriname, uk, uS
DeBeers botswana 21 (1) Angola, DRC, Namibia, Norway, Russia, South Africa (2) Canada, China, India, Japan, luxembourg, Spain, Tanzania, uk, uS
Freeport-McMoRan uS 13 (1) Chile, DRC, Indonesia, peru Copper & Gold
Gold Fields South Africa 34 (1) Chile, DRC, Ghana, Guinea, Indonesia, Mali, peru, Venezuela (2) Australia, burkina Faso, Canada, China, Dominican Rep, Finland, uS
Lihir Gold papua New Guinea n/r (1) papua New Guinea (2) Australia, Ivory Coast
Katanga Mining uk 68 (1) DRC Limited (2) Canada
Lonmin uk 38 (1) South Africa
Mitsubishi Materials Japan 16 (1) Chile, Indonesia, Mexico, Russia, Vietnam (2) Australia, brazil, Canada, China, France, Germany, India, Italy, luxembourg, Malaysia, Netherlands, Singapore, Spain, South korea, Thailand, uk, uS
Newmont uS 28 (1) bolivia, Ghana, Indonesia, Mexico, peru (2) Australia, Canada, New Zealand
Nippon Mining & Japan 18 (1) Chile, peru Metals (2) Australia, China, Germany, korea, Malaysia, philippines, Singapore, uS
Oxus Gold uk n/r (1) uzbekistan
OZ Minerals Australia n/r (1) Indonesia (2) Australia, Canada, laos
Rio Tinto uk/Australia 8 (1) Chile, Guinea, Indonesia, Mongolia, Namibia, peru, South Africa, Zambia (2) Argentina, brazil, Canada, France, India, Madagascar, New Zealand, uS
Sumitomo Metal Japan 62 (1) Chile, Indonesia, peru Mining (2) Australia, Canada, China, Malaysia, Netherlands, New Caledonia, philippines, Singapore, South korea, Thailand, uS
Teck Cominco Canada 24 (1) Chile, Mexico, peru (2) Australia, brazil, Ireland, Turkey, uS
Vale brazil 6 (1) Angola, Chile, Colombia, Guinea, Indonesia, Mongolia, Norway, Oman, peru, South Africa (2) Argentina, Australia, brazil, Canada, China, France, Germany, India, Japan, Mozambique, New Caledonia, Singapore, Switzerland, South korea, uk
Xstrata Switzerland 9 (1) Chile, Colombia, Norway, papua New Guinea, peru, South Africa Selection of companies follows an internal compilation based on reported company revenues in 2007. List of countries is merely illustrative and not intended to be a comprehensive listing of all company operations. (2) Argentina, Australia, brazil, Canada, Dominican Rep, Germany, Jamaica, New Caledonia, Tanzania, Spain, uk, uS Note: *ArcelorMittal became an EITI supporter on January 20, 2009
ADVANCINGTHE EITI INTHE MINING SECTOR 1 The future of the EITI in the mining sector mining operators. In 2008, the Secretariat, together with As the EITI consolidates as a global standard, the Initiative supporting institutional investors, developed a campaign to accumulates valuable lessons that facilitate its strengthening reach out to a large number of companies in the sector in order and further development. The EITI methodology has been to boost company support for the Initiative. shown to be flexible enough to accommodate variations not Much work remains to be done to expand support among only across the mining and oil and gas sectors, but also across mining companies. This will need to be taken on by all EITI countries. However, ample scope remains for further expanding partners at the international, national, and local levels. To the range of countries and companies engaging in the EITI illustrate the large number of mining companies operating process, and for fine-tuning EITI implementation. around the world, the table below shows the main companies operating in both resource-rich countries and other countries New countries with important mining sectors. It is encouraging that important mining countries such as botswana, Indonesia and Zambia have advanced considerably Tailoring the EITI to the mining sector in their process of preparing for EITI candidacy. The Secretariat The International Advisory board’s report in 2006 identified (in coordination with the World bank through the EITI the need for “a tailored approach that properly addresses the Multi-Donor Trust Fund) remains in contact with other key particular circumstances of the mining sector”,9 and recommended mining countries such as Chile, papua New Guinea and South that key mining industry actors should be engaged to bring Africa to ensure that the EITI is being considered as a valuable broader expertise in responding to the “needs to adapt the EITI tool for all these countries. model to this sector”.10 On the other hand, as was highlighted Additionally, there are implementing countries such as earlier in this chapter, the current EITI Methodology is Cameroon, Côte d’Ivoire and kazakhstan in which oil and gas sufficiently flexible to accommodate many of the specific needs dominates the extractive sector but there are also significant related to local and structural conditions of the mining sector. mining operations. The Secretariat is ready to assist the local EITI Moreover, the EITI is currently mid-way into the first committees to further study their mining sectors and discuss significant batch of Validations. These processes will provide the benefits of expanding their EITI processes to include mining useful lessons on the use of the current EITI methodology. operations. This feedback, together with continuous consultations with The Secretariat has initiated a dialogue with some of these mining stakeholders, will put the EITI in a much better position countries, and remains attentive with others, to explore how to incorporate any refinements into the methodology to better their experiences in managing mineral wealth can contribute to serve the mining industry. the enrichment of the EITI and how these countries can benefit This publication is the result of consultations with mining from increased transparency. stakeholders. The next section provides a discussion on the Chapters 15 and 16 in the Case Study section describe how background upon which the EITI is implemented in the mining developed countries such as Australia and Canada address sector. A subsequent section brings several case studies that transparency for their mining sectors. Other countries not listed illustrate different facets of the diverse issues that affect the in the IMF tables, such as philippines, Argentina, burkina Faso, implementation of the EITI in mining countries. It also brings Cambodia, Dominican Republic, French Guyana, Jamaica, laos, experiences, through 10 country case studies, from traditional Malaysia, Morocco, Mozambique, pakistan, Suriname, uganda and important mining countries. Finally, three important pieces and Zimbabwe, remain a segment of the mining universe that of guidance of EITI implementation – the EITI business Guide, needs further consideration. the Civil Society Guide to the EITI and the World bank’s Guide on Implementing the EITI – are supplemented, addressing New companies particular issues to the sector. These include materiality, social A total of 23 mining companies are formal supporters of the EITI. contributions, artisanal mining and the important issue of Of these, 13 are among the top 25 and 19 are among the 70 sub-national flows that often affect mining countries. largest global mining companies ranked by revenues.7 However, The important observations and discussions offered in this the mining industry is much more diverse than the oil and gas publication, and their further discussion, will contribute to the industry.8 In many countries and in many mining subsectors further progress of the Initiative and will ultimately move there are a large number of companies operating (not to countries closer to the goal of ensuring that natural wealth mention that much mineral exploitation is carried out by turns into equitable growth and sustainable development. small-scale production units), that, although not important in terms of volume, are important sources of local employment. Dr Francisco Paris is the Regional Director for Latin America and This aspect of the mining industry poses a further challenge for responsible for mining issues and Dr Sam Bartlett is the Regional the Initiative in terms of expanding its support among smaller Director for Asia-Pacific, both, at the EITI International Secretariat in oslo.
1 ADVANCINGTHE EITI INTHE MINING SECTOR SElECTED MINING COUNTRIES AND MAIN OPERATORS
Country Mining industry
Algeria Arcelor Mittal, bHp billiton, SNIM Angola Anglo American plC, bHp billiton, CAMEC, Debeers, Mwana Africa plc, Vale Argentina AngloGold Ashanti, Arcelor Mittal, Areva, barrick Gold, Codelco, Glencore, Holcim, Imerys , pan American Silver Corporation, Rio Tinto, Vale, xstrata bolivia Glencore, Newmont, pan American Silver Corporation botswana Anglo American plc, Iamgold, Mwana Africa plc, Trivalence Mining Corp. brazil Alcoa, Alumina ltd., Anglo American plc, Anglo platinum, AngloGold Ashanti, Arcelor Mittal, Areva, bHp billiton, Codelco, Highveld Steel and Vanadium Corporation ltd, Holcim, IAMGOlD, Imerys, lafarge, Mitsubishi Materials, Rio Tinto, Teck Cominco, Vale, xstrata burkina Faso Areva, Holcim Cambodia Oxiana limited Cameroon lafarge Central African Republic Areva, Metorex ltd Chile Anglo American plc, Areva, barrick Gold, bHp billiton, Freeport-McMoRan Copper & Gold, Gold Fields, Grupo Mexico, Holcim, Imerys, JNMC, lafarge, Mitsubishi Materials, Nippon Mining & Metals, Rio Tinto, Southern Copper Corporation, Sumitomo Metal Mining, Teck Cominco, Vale, xstrata China Anglo American plc, Anglo platinum, Arcelor Mittal, Areva, bHp billiton, Codelco, Debeers, Exxaro Resources limited, Gold Fields, Holcim, Imerys , Incitec pivot limited, lafarge, lkAb, Mitsubishi Materials, Nippon Mining & Metals, Oxiana limited, RuSAl, SNIM, Sumitomo Metal Mining, Vale Colombia Anglo American plc, AngloGold Ashanti, Areva, bHp billiton, Glencore, Holcim, Vale, xstrata Côte d’Ivoire Areva, Holcim , Red back Mining Inc Congo Republic CAMEC, Metorex ltd Democratic Republic of Congo Anglo American plc, AngloGold Ashanti, Debeers, First Quantum Minerals, Freeport-McMoRan Copper & Gold, Gold Fields, katanga Mining limited, lundin Mining, Moto Gold Mines, Mwana Africa plc Dominican Republic barrick Gold, Gold Fields, Holcim, xstrata Ecuador Antofagasta plC, Holcim, Iamgold, lafarge Egypt Areva, Holcim, lafarge French Guyana Holcim, Iamgold Gabon Comilog, De beers, CICMG, Sinosteel, Southern Era, Vale Ghana Alcoa, AngloGold Ashanti, Gold Fields, Iamgold, Metorex ltd, Mwana Africa plc, Newmont, Red back Mining Inc Guinea Alcoa, Alumina ltd, AngloGold Ashanti, bHp billiton, Gold Fields, Holcim, Rio Tinto, RuSAl, Societe Semafo, Trivalence Mining Corp, Vale India Anglo American plc, Arcelor Mittal, Areva, Codelco, Debeers, Holcim, Imerys, lafarge, Mitsubishi Materials, Rio Tinto, Vale, Vedanta Resources Indonesia Areva, bHp billiton, Codelco, Freeport-McMoRan Copper & Gold, Gold Fields, Holcim, Imerys, Incitec pivot limited, lafarge, Mitsubishi Materials, Newmont, Oxiana limited, Rio Tinto, Sumitomo Metal Mining, Vale Jamaica Alcoa, Alumina ltd, Glencore, RuSAl, xstrata Jordan lafarge kazakhstan Arcelor Mittal, Areva, Glencore, kazakhmys , RuSAl kyrgyzstan kazakhmys laos AngloGold Ashanti, Oxiana limited liberia Arcelor Mittal Madagascar Exxaro Resources limited, Holcim, Rio Tinto Malaysia Areva, Codelco, Holcim, Imerys, Incitec pivot limited, lafarge, Mitsubishi Materials, Nippon Mining & Metals, Sumitomo Metal Mining Mali AngloGold Ashanti, CAMEC, Gold Fields, Iamgold Mauritania First Quantum Minerals, Red back Mining Inc
ADVANCINGTHE EITI INTHE MINING SECTOR 1 SElECTED MINING COUNTRIES AND MAIN OPERATORS
Country Mining industry
Mexico Anglo American plc, Arcelor Mittal, Areva, Codelco, Holcim, Imerys, Incitec pivot limited, lafarge, Mitsubishi Materials, Newmont, Oxiana limited, pan American Silver Corporation, Southern Copper Corporation, Teck Cominco Mongolia Rio Tinto, Vale Morocco Arcelor Mittal, Holcim, lafarge, Mineral Commodities ltd Mozambique bHp billiton, CAMEC, Codelco, kenmare Resources plc, Metorex ltd., Mineral Commodities ltd, Vale Namibia Anglo American plC, AngloGold Ashanti, Areva, Debeers, Exxaro Resources limited, Holcim, Rio Tinto New Caledonia Holcim, Sumitomo Metal Mining, Vale, xstrata Niger Areva, Societe Semafo pakistan Antofagasta plc, Areva, barrick Gold, bHp billiton, JNMC, SNIM papua New Guinea barrick Gold, bHp billiton, Mineral Commodities ltd philippines AngloGold Ashanti, Glencore, Holcim, JNMC, lafarge, Nippon Mining & Metals, Sumitomo Metal Mining peru Anglo American plc, barrick Gold, bHp billiton, China's Shougang Corp., Freeport-McMoRan Copper & Gold, Glencore, Gold Fields, Grupo Mexico, Holcim, Iamgold, Imerys, Newmont, Nippon Mining & Metals, pan American Silver Corporation, Rio Tinto, Southern Copper Corporation, Sumitomo Metal Mining, Teck Cominco, Tiomin Resources Inc, Vale, xstrata Russia Anglo American plc, Anglo platinum, AngloGold Ashanti, Areva, barrick Gold, Debeers, Glencore, Holcim, Imerys , Incitec pivot limited, lafarge, lundin Mining, Mitsubishi Materials Sierra leone TRG South Africa Anglo American plc, Aquarium platinum plc, Arcelor Mittal, Areva, barrick Gold, bHp billiton, CAMEC, Codelco, Debeers, Holcim, Imerys, Incitec pivot limited, JNMC, lafarge, lonmin, Mineral Commodities ltd, Rio Tinto, Trivalence Mining Corp, Vale, xstrata Sudan Areva, CAMEC Suriname Alcoa, Alumina ltd, bHp billiton, Iamgold Tanzania Anglo American plc, AngloGold Ashanti, barrick Gold, Debeers, Holcim, IAMGOlD, lafarge, xstrata Trinidad and Tobago Alcoa, Arcelor Mittal, bHp billiton Tunisia Imerys, Oxiana limited, SNIM united Arab Emirates Anglo American plc, Areva, Highveld Steel and Vanadium Corporation ltd, Imerys uganda lafarge, Moto Gold Mines ukraine Arcelor Mittal, Imerys, lafarge, Mineral Commodities ltd, RuSAl uzbekistan Oxus Gold Venezuela Alcoa, Anglo American plc, Areva, Gold Fields, Imerys Zambia Antofagasta plC, First Quantum Minerals, Glencore, lafarge, Metorex ltd, Rio Tinto, Vedanta Resources Zimbabwe Anglo American plc, Anglo platinum, Aquarium platinum plc, CAMEC, Imerys, Implats, Mwana Africa plc
3 Idem. Other references 4 Mehlum, Halvor, karl Moene and Ragnar Torvik (2006),“Institutions and The Validation Grid can be found in the Validation Guide on the EITI’s the Resource Curse”,in The Economic Journal 116 (January). website. 5 http://eitimongolia.mn/index.php Humphreys, Macartan, Jeffrey D. Sachs and Joseph E. Stiglitz, eds (2007), 6 Escaping the Resource Curse, Columbia university press. http://minerals.usgs.gov/ 7 According to ranking prepared internally in the Secretariat based on reported revenues in 2007. 8 See the tables at the end of this chapter. Notes 9 1 International Monetary Fund (2006), “Guide on Resource Revenue EITI, “Report of the International Advisory board”. Transparency”. 10 Idem. 2 World bank, uNCTAD and ICMM (2006), “The Challenge of Mineral Wealth: using resource endowment to foster sustainable development”.
20 ADVANCINGTHE EITI INTHE MINING SECTOR 3 THE STRuCTuRE OF THE GlObAl MINING SECTOR
PAUL MITChELL
There are a number of ways by which the structure of the mining sector can be described. The two most common, by the minerals cycle and the industry structure, are outlined in the following sections.
The minerals cycle time as quality deposits in developing countries become The minerals cycle is illustrated in Figure 1. It commences with depleted and international investment conditions change. society’s demand for mineral products and ends with either between 1990 and 2005, the share of world mining output the disposal or re-use of final products. Although the cycle is increased in Australasia, Asia (especially China) and latin common to all minerals, they are not homogenous substances America, while it fell in Africa, Europe, North America and the and they are normally divided into four classes, namely: Commonwealth of Independent States (CIS). It is difficult to • metalliferous minerals, including base and ferrous metals, predict with certainty the locations of future mining activity, precious metals and minor metals; but a guide can be obtained from construction and exploration • energy minerals; spending. Table 1 shows recent trends and forecasts of future • industrial and construction minerals; and activity. It can be seen that Australia, North America and other • diamonds and precious gems. traditional mining centres will remain important, latin America’s Some minerals are reasonably abundant in the Earth’s crust; for share will increase, and there will be growth elsewhere, but instance, aluminium and iron make up 8% and 4% by mass shares on a global scale will be relatively small. respectively. but most minerals are concentrated in relatively In volumetric terms, production of construction materials, few deposits that have resulted from distinctive formative such as sand and gravel, constitute by far the largest volumes processes – geological, fluvial and biological. mined, with world production exceeding 15 billion tonnes The concentration of mineral deposits is one of the key annually; base metals, particularly iron ore and bauxite determinants of their economic potential for extraction. (aluminium), are next, but the volumes are much smaller, with Minerals are normally classified according to their in-situ typical annual steel production being 800 million tonnes, and concentration, with resources being subdivided according aluminium about 28 million tonnes. production of rare metals, to increasing levels of geological confidence into inferred, such as platinum, is a small fraction of these figures, being indicated and measured classes. beyond geological typically less than 200 tonnes per annum. classification, deposits are further classified after consideration The minerals cycle results in a characteristic financial cycle of technical and financial factors to define the mineable portion, for mining projects: risk expenditure for exploration, further and this is known as the measured or indicated resource. expenditure for planning, feasibility and development, then a Minerals are produced in many countries, but this varies over profitable operations phase, and finally a cost phase for closure.
ADVANCINGTHE EITI INTHE MINING SECTOR 21 Figure 1. The minerals cycle
Return to the environment
Disposal Society’s need for minerals and metals
Consumption/use Re-use
Incorporation Recycling Exploration into products Re-manufacture
Semi-fabrication and fabrication Mine site development
Mine site closure Extraction Smelting and and rehabilitation mining reÞning Ore extracted Milling, washing, grading, concentrating Land reclamation Wastes Emissions initiated
Mine closed Some industrial minerals sold Land available for directly other uses (such as salt and sand)
Source: Adapted from a diagram produced by Natural Resources Canada
Table 1. Regional production and prospective investment 200 10 200 Mine Mine Construction Pipeline projects Planned exploration production1 production underway2 tracked spending3 Region % Share % Share % Share % Share % Share Africa 11 7 10 16 17 Australasia 13 16 30 20 17 South America 14 20 34 32 18 North America 24 15 13 12 32 Rest of world 38 41 14 19 16 China 8 17 523 Other Asia 7 10 293 Europe + CIS 23 14 7810 Total 100 100 100 100 100 Source: Commodities Research Unit, london; Raw Materials Group, Stockholm; Metals Economics Group, Canada
22 ADVANCINGTHE EITI INTHE MINING SECTOR Although this financial cycle is common to all mining projects, single deposit but often grow over time; intermediates offer the diversity of the minerals cycle means that the actual potential for growth through mergers and may eventually financial circumstances of projects varies widely from deposit to become“seniors”,which provide the expertise, capital and risk deposit, according to location, type of mineral, and over time as management capacity to develop and operate major mines conditions at a particular mine change. Among other things, around the world. The industry structure described above is this makes it difficult to impose uniform taxation rules, and shown in Figure 2. some flexibility is often required, as is discussed in the next In recent years there has been significant merger and chapter. acquisition activity in the mining industry, with resultant concerns about concentration of control of reserves and Industry structure production capacity. There has been an increase in corporate At first glance the wide range of organisations that make up concentration for most major minerals during the period 1975 the mining industry seem fragmented and disorganised. to 2005, as Table 2 shows. However, this has been balanced by Organisations range from small entrepreneurial exploration growth in market size and the emergence of new mining companies –“juniors”– to major multinational companies. majors, particularly from developing countries, with Vale (brazil), However, history has shown that the industry’s structure is, Vedanta and ArcelorMittal (India), and united Aluminium and in fact, an integrated and efficient production system with Norilsk (Russia) being good examples. This means that corporate different types of companies occupying niches that are concentration has not been great enough to affect the responsive to specific needs, opportunities and risks. Junior competitiveness of markets. Even in highly concentrated companies find new ore bodies and sell them to larger markets, such as for platinum, there is little sign that miners companies;“intermediates”are typically formed to exploit a can exploit market power.
Figure 2. Global corporate mining section – firm size and organisational focus
Non-ferrous metals Other sectors Other metallic minerals Energy and fuels Global giants Diversified Industrial and construction minerals
Vertical
Seniors Strategic (controllers)
Commodity-focused
Acquisitional Intermediate and nationals Production
Investor/controller
Large firms Expansionary > US$100m assets juniors
Production
Small firms Exploration juniors Development Exploration Prospectors/ private firms Source: Adapted from MacDonald (2002) ADVANCINGTHE EITI INTHE MINING SECTOR 23 Table 2. Mining sector concentration by company 1-200 Sector Top producers % 200 Top producers % 1 Gold Mining 33.9 54.8 platinum Mining 86.6 63.3 Copper Mining 39.1 29.7 Iron Ore 41.3 16.9 Aluminium 46.9 38.9 bauxite Mining 47.3 48.8 Nickel Mining 53.3 51.5 lead Mining 28.9 22.9 Zinc Mining 27.3 21.7 Source: Raw Materials Group, Stockholm According to the Raw Materials Group (RMG, 2006) excessive Many of the factors described above, particularly the greater concentration is also not evident when assessed according to liberalisation of mining investment conditions in developing relative company size. In 2006, the 10 largest companies countries, mean that large segments of the industry are truly accounted for 27% of the value of total world production. global. While this is not the case for commonly occurring Again, growth in the size of the sector and new entrants large-volume construction materials, it is certainly so for the have had mitigating effects. many minerals that are traded in global markets. This means A further significant feature of the current industry structure that today companies are increasingly comparing investment is that the share held by private investors is now at its highest opportunities across a wide range of countries, and governments level for 50 years (see Figure 3). This reflects ongoing State have become more aware that they are operating in a competitive withdrawal from ownership of mines, which has been international marketplace. This has implications for countries particularly marked in Russia, India, and Central Asia and is mining administration systems generally, including their beginning to occur in China. It means that much more of the taxation regimes. industry is subject to market discipline, and also a need for both effective regulation and better government/industry/civil Mining industry risks society collaboration. Many commentators believe that the mining industry has a number of risks that distinguish it from other sectors and may Figure 3. Private sector share of mining production (%) make business conditions more challenging. These risks can be 1-200 (non-weighted average 8 metals) summarised as follows: • The fixed location of resources: financially viable mining can only occur where appropriate resources are located, and, as 75 explained above, this is a function of geology. Increasingly, 70 as accessible quality deposits are depleted, mines are developed in more distant locations and increasingly in 65 developing countries. because assets are immobile they are exposed to socio-political risks including coercive changes 60 to tax regimes. 55 • Mineral resources are natural capital: the geological resources of nations are a significant component of their 50 non-renewable natural capital. Societies expect that these 1975 1984 1989 2000 2005 resources will be transformed into human capital in a way that produces tangible benefits for affected communities. Source: Raw Materials Group, Stockholm Disquiet and instability can be expected when communities see little benefit, particularly when operations are profitable and are conducted by international companies. • Macro-economic risks: large resource-based revenues can hinder economic competitiveness. The major causes are typically high exchange rates, movement of capital away 2 ADVANCINGTHE EITI INTHE MINING SECTOR from other productive sectors, bloated and inefficient public understand the minerals cycle and the industry structure; trust sectors supported by large resource revenues, and wide among the parties; and governments’effectiveness in providing fluctuations in revenue streams due to changes in public goods financed by mining revenues. commodity prices. While not inevitable, as the experience of successful resource-endowed countries shows, dealing with Conclusions macro-economic risks does pose particular challenges for The mining sector is diverse in many ways: by commodity and the nations concerned. geography, and by size, type and capacity of company. • The scale and long-term nature of investments: of necessity, Notwithstanding this, it shares common minerals production mineral resource investments are long term, extending and financial cycles. Overlying these two cycles are various risks through exploration, planning and feasibility, which can affect output and profitability, and therefore public commissioning and operations, and rehabilitation and revenues. post-closure phases. In fact, each of the above phases is The industry is based on the exploitation of nations’ risky, bringing, for example, chances of exploration failure, non-renewable capital, and thus social expectations are greater variability of resource quality during operations, and than for most other industry sectors. This means there is a need extended post-closure liabilities such as unforeseen acid for collaboration, trust and understanding among stakeholders, rock drainage. Also, mining investments are frequently so that realistic goals are set and beneficial outcomes are large, especially in the early stages when construction of achieved for all parties. One particularly important area is the substantial transportation, processing and community design and administration of taxation systems – the subject of infrastructure is necessary; this means that investments the next chapter. often have long pay-back periods and require fiscal stability for success. Paul Mitchell is Director of Mitchell McLennan Pty Ltd, a specialist • Social, safety and environmental risks: by its very nature environment and planning consultancy in Australia and former mining must cause some environmental and social President of the International Council on Mining and Metals (ICMM) disruption. The industry also has inherent safety risks, with and former Member of the EITI International Board. some claiming that it is the most dangerous of all industry sectors. These impacts can normally be responsibly managed, but the risks can never be removed, and when incidents occur they can lead to an unravelling of worker, community and political support, which disrupts production. The magnitude of the above risks varies from situation to situation and according to the experience and capacity of the operating company. Greenfield exploration, for example, relies on the prediction of ore genesis to identify areas of prospective mineralisation. While the rewards may be great, the chances of success are low; in the gold industry, the rate is about one in 1,000 drill holes, and in base metals it ranges from one in 50 to one in 100. Such risks have wide implications for all involved in the sector: for financiers who provide capital, insurers who underwrite risks, mining companies who borrow or use their own capital, the shareholders or owners of these companies, governments that depend on taxes and other payments from mining, and communities that depend on mining for jobs and other public goods. A particularly relevant risk in the EITI context is loss of political or community support, which normally occurs when affected parties believe they are not receiving a fair return for the exploitation of their non-renewable natural capital. It is generally accepted that greater transparency is part of the solution to this risk. To be effective, however, such transparency needs to be accompanied by informed stakeholders who ADVANCINGTHE EITI INTHE MINING SECTOR 2 References Commodities Research unit (2006),“Data on Minerals Markets”. unpublished paper for World bank. Gauveila, J., Rose, p.& Gingerich, J. (2003),“The prospector Myth – Coming to Terms with Risk Management in Mineral Exploration”. unpublished presentation to pDAC annual conference. IIED & WbCSD (2002),“breaking New Ground: Mining, Minerals and Sustainable Development”.Earthscan, london. MacDonald, A. (2002),“Industry in Transition: A profile of the North American Mining Industry”.unpublished paper for MMSD. Metals Economics Group (2006),“Corporate Exploration Strategies”. www.meg.com. Mitchell, p.A.(2005),“The Role of Corporate Responsibility in business”. unpublished presentation at london business School. Natural Resources Canada (2002),“The Minerals Cycle”.unpublished. Raw Materials Group (2006),“Data on Mining Industry Concentration”. unpublished paper for World bank. World bank (2006),“The Outlook for Metals Markets”.background paper for G20 Deputies Meeting, Sydney 2006, unpublished. Notes 1 Commodities Research unit, london. Non-weighted average share of output of six metals (gold, copper, zinc, iron ore, nickel, lead). 2 Raw Materials Group, Stockholm. Note: data base is likely to understate prospective brownfield investments and prospective investments by State and quasi-State companies (e.g. in China). 3 Metals Economics Group, Canada. 2005 Corporate Exploration Strategies. 2 ADVANCINGTHE EITI INTHE MINING SECTOR TAxATION AND INVESTMENT ISSuES IN MINING PAUL MITChELL Between 1 and 200 over 100 hundred countries introduced new mining laws, most involving reforms to their fiscal systems, including taxation. These reforms were motivated by a desire to encourage greater mining investment and concerns about the public–private shares of mining revenues. It is clear that tax revenues derived from mining activities represent an important public policy issue. This chapter outlines key policy issues as they relate to the mining sector: the role of tax in companies’investment decisions; the optimum level of tax and effective tax administration; observations about a“good”taxation system; and conclusions about the role of tax regimes in development generally. The role of tax in investment decisions objectives of the two key players: companies and governments. Mining is a cyclical industry, and investment in exploration and For companies, the overall level of tax, including royalties, mine development follows these cycles. All regions of the world influences incentives to explore and develop. Higher taxation are affected by this cyclicity, and, as mentioned in the previous levels are likely to reduce incentives to invest, and, in marginal chapter, companies usually compare numerous development cases, even to keep some mines operating. The timing of tax options internationally, and screen these options to obtain charges also influences investment patterns. Raising tax rates the best balance between risk and reward. The key factor will increase government receipts in the short term, but if determining investment decisions is the geological potential an increase is too high it will discourage exploration and of a site, but it is strongly offset by fiscal and socio-political development, thus reducing the tax revenues generated considerations, with the former including tax rates and the latter by the sector over the longer term. the stability of the tax system. Table 1 below details the most Different types of taxes influence investment behaviour and important criteria which companies consider in making government administration. For instance, taxes based on units investment decisions, and it can be seen that more than a of production irrespective of profitability may create economic third relate to taxation. inefficiencies by discouraging the exploitation of lower grade ore and shortening the life span of some mines. Conversely, Designing mining tax systems taxes on corporate profits (and to a lesser degree incomes) are The ultimate goal of any government's mining tax system is more efficient and recognise the inherent risks in mining to ensure the greatest possible benefit for the public while operations, particularly wide fluctuations in international simultaneously encouraging investment in the sector. Achieving minerals prices and the difficulties of anticipating all geological, this requires realistic consideration and careful balancing of the technical, financial and political factors over a mine’s lifetime. ADVANCINGTHE EITI INTHE MINING SECTOR 2 Table 1. Top ten company decision criteria in mining investments 1 Geological potential for target mineral 2 Profitability of potential operations 3 Security of tenure and permitting 4 Ability to repatriate profits 5 Consistency of minerals policies 6 Realistic foreign exchange controls 7 Stability of exploration terms and conditions 8 Ability to pre-determine environmental obligations Ability to pre-determine tax liability 10 Stability of tax regime Bold: tax-dependent. Italics: tax-related. Source: UN survey of companies quoted by Prof. James Otto, 200, unpublished. Notes: the survey included a total of 62 factors, not necessarily in the numerical order given. Further, profits-based taxes tend to distribute these risks more • Mine development: this too is a high-cost phase requiring the evenly between companies and the state. While perhaps purchase of substantial capital inputs, most of which need economically superior, the challenge with profit-based systems to be imported. Typical responses are to enable accelerated is their greater complexity, which may be a genuine constraint recovery (depreciation) of capital costs once production in developing countries with limited administrative capacity. begins, and to have low import duties and value added Also, more complex profit-based systems have greater potential taxes (VATs). for corruption and tax fraud – key concerns in the EITI context. • Production: minerals production is the longest and most When deciding whether or not to invest, companies consider profitable phase in the cycle and is usually when payments not only the expected rate of return (or profitability) but also the to the government begin to be generated. However, associated risks of a new project. An important risk consideration minerals are sold into competitive markets and prices is the perceived stability of a tax regime over time. perceived fluctuate, meaning that governments often provide stability is also important for governments. This is because of flexibility, such as relief from export duties and VATs, or, in the risk–return trade-off: where companies perceive greater more serious cases, relief from other more substantive taxes. risks, they and their financiers will demand a higher return, • Post-mining: after mining ceases and there is no income, thus lowering the returns available to the government when projects often incur significant rehabilitation costs and also determining the required profitability of a new project. in some instances extended liabilities for site management. Therefore, tax systems play an important role for the government The typical response is to provide tax deductibility to in terms of influencing the relative attractiveness of a jurisdiction encourage companies to set aside funds progressively for investors. during the production phase. Some have suggested that tax To summarise: a government's objective for the minerals relief for such funds should not apply because rehabilitation sector is to obtain an appropriate share of income and to foster is a social responsibility. development, while companies want an adequate return on Some mines are large in scale and have long life spans, and investment. Thus, it is in the interests of both parties to facilitate these need specific consideration. Such large, long-life mines projects that are successful for their full potential life-spans. may operate through many political regimes and economic cycles, and can involve numerous laws. A common response in key issues affecting taxation systems these circumstances is to negotiate specific agreements which A number of factors that are unique to the mining sector need provide some stability for key items like tax terms. full consideration in the design of mining tax regimes. The A further consideration is that minerals are a finite resource primary one is the characteristic minerals and financial cycle and are subject to property rights laws – in most countries that was discussed in Chapter 3. The cycle means that different minerals are owned by the state. To compensate for lost mines have differing capacities to pay taxes at various points, as property rights many nations impose royalties, or encourage is explained below. companies to invest in infrastructure and other public goods. • Exploration: this is a substantial cost phase without any To accommodate variations in the value of different minerals income and is highly risky. Governments typically respond and in the scale of mining operations, tax systems often vary by allowing losses to be carried forward and to be off-set royalties according to mine scale and commodity value. against profits in the production phase. This has the Other factors require consideration. Companies can pay secondary benefit of encouraging firms to continue beyond taxes or reduce the tax payable by investing in additional exploration to development. infrastructure and other public goods – how does a tax system 2 ADVANCINGTHE EITI INTHE MINING SECTOR balance these trade-offs? Minerals must be processed after realistically known. In theory this can be obtained by building extraction – how should a tax system encourage greater domestic models of all (or typical) mines’cash flows in the jurisdiction processing? concerned. In practice such an exercise may be impractical, as It is important to note the above distinctive features of the such models must incorporate assumptions about prices, costs mining industry and how they affect taxation. There is however and production volumes, etc., which will change over time. an opposite argument which says that tax systems should be Notwithstanding these challenges, for public policy to be uniform across all industry sectors. uniformity encourages effective and credible, decision-makers must understand the economic efficiency where investment attractiveness is not impacts of changing tax rates, adding or deleting a tax, offering distorted by government incentives, reduces the potential for incentives, or any combination of these, before policy changes harmful special-case lobbying by industry, and reduces are made. administrative complexity. It is instructive to note what has emerged as most common All these factors mean that designing good tax systems for the international practice in regard to ETRs. Figure 1 below shows minerals sector is challenging. In practice, perhaps the best comparative ETRs for a hypothetical copper mine, but uses systems are those which are essentially uniform across all industry actual taxes applicable in major mining countries. It can be seen sectors but which recognise some distinctive features of mining that the majority of countries fall within the range of 40-50% and provide some flexibility, such as flexible profit-based ETR. This implies that tax and company profit would be about royalties. The designing of royalty regimes is not without its equal over the life of a mine. With an ETR of 50% and a typical challenges however. Systems based on economic theory often cost structure for a 20-year medium-sized copper mine, this incorporate technical considerations (e.g. geology) and would imply 17% of gross revenues going to corporate profits sophisticated calculations. In practice, some of the necessary and the same figure going to taxes (see Figure 2). inputs for these models are hard to obtain. This difficulty often leads governments to use royalties systems that are simpler to An effective tax system administer, especially administrations that do not have the Given the diversity of operations in the mining sector, it is technical capacity to manage the complex mechanisms required impossible to define an ideal tax system for all jurisdictions. for optimal royalties calculations. There is, however, a common objective of encouraging Governments need to understand the effects of their tax successful and sustainable projects that exploit resources fully systems on investment and respond accordingly. Fortunately, while avoiding social costs. In this context, four observations can there is a ready measure that they can use, which is based on be made about a good tax system. relative exploration expenditure: all things being equal (including Tax levels and transparency. Governments should try to maximise tax), a country should attract exploration investment proportional tax revenues over the longer term by encouraging investment in to its international geological attractiveness rating. If investment their jurisdiction and a profitable and technologically advanced is less, it implies other faults in the investment climate, such as industry. To do this they need to institute tax systems that are excessive tax. However, if investment is greater than geological neutral or progressive to motivate corporate innovation and potential, investment conditions may be overly generous. profit-seeking. Regressive taxes that take increasing shares of profits and discourage investment should be avoided. Evaluating a tax system Given that any set of tax rates and the mix of taxes will be Given the sensitivity and importance of minerals taxation as a based on assumptions about future prices and costs, and that public policy issue, it is essential that key stakeholders consider these will inevitably change over time, there should be a it to be fair and reasonable. Inclusive procedures for objective preference for transparency. This can be implemented by evaluation are needed. Here, the main questions are: establishing multi-stakeholder bodies to conduct regular • Are payments to society adequate? reviews of key assumptions, so that any policy change is • Are investors receiving a fair return? predictable and decision-making is consensual. • Is the system competitive with those of other nations or Mix of taxes. previous discussion has shown that the mining provinces? industry is often subject to many taxes, frequently levied by It is essential to address two factors for any evaluations to be different levels of government. This is counter to the objectives legitimate. First, evaluations must incorporate all applicable of simplicity and uniformity in taxation systems to ease taxes and fees; one measure of this is the Effective Tax Rate or administrative burdens and reduce the risks of corruption, poor ETR (Otto, J., 2005, unpublished) – the value of all payments to policy and fragmented public expenditure. Also, taxes should be governments divided by the value of gross or pre-tax profits. responsive to fluctuations in minerals prices. In combination The second factor is the need to understand as clearly as these factors suggest that preference should be given to possible the particular financial circumstances that apply in the centralised direct taxes, based on profit or income, while mining sector being evaluated, so that its capacity to pay is reliance on indirect taxes, such as units of production or ADVANCINGTHE EITI INTHE MINING SECTOR 2 Figure 1. Model copper mine: comparative effective tax rates Uzbekistan Ivory Coast Mongolia Ghana Guinea Greenland USA (Arizona) Mexico Poland Tanzania Peru Indonesia Kazakstan Philippines South Africa Bolivia Papua New Guinea China ideal range? Argentina ETR = 40-50% Zimbabwe Chile Western Australia Sweden 0 10 20 30 40 50 60 70 Effective Tax Rate (%) Figure 2. Division of mine revenues 20 year typical medium sized copper mine Gross revenue: uS$3.3 billion (50% Effective Tax Rate) loan costs 2% Bank profits 17%* Operating costs 44% New exploration New mines Wages Dividends Consumables Spares Power Taxes and fees 17%* Water Community National Provincial local * Note 50% division Capital costs 21% Contractors Suppliers Infrastructure Others 30 ADVANCINGTHE EITI INTHE MINING SECTOR value-based taxes, should be minimised. Conclusions Uniformity across sectors. Many countries have special tax The taxing of mining activities is an important public policy systems for their mining industry, and, as stated previously, this issue that raises questions of fairness about the exploitation of adds complexity, costs and risks. It is feasible and preferable for nations’natural capital. unfortunately, the sector is so diverse mining companies to be subject to a country’s general tax that it is not possible to specify an optimum tax system that can system, perhaps incorporating a few special allowances such as be used as a model, although certain universal characteristics of a royalty. putting all tax-payers on an equal footing can provide good systems can be defined. Given that any system will be greater certainty, stability and efficiency, and increase incentives based on a set of assumptions about the future that will change, for governments to improve tax administration and fiscal a fundamental principle is that there is a strong case for policy-making more generally. For industry, one important transparency and inclusiveness. All stakeholders share a benefit is the reduction in pressures for coercive taxation once common goal of seeking successful and sustainable projects capital investments have been made and thus become that foster development. In seeking to achieve this goal, it is immobile. essential for all to realise that the tax system is only a part of the Distribution of tax revenues. The allocation of revenues between challenge: as tax systems increasingly converge, the question of different tiers of government is a long-standing and increasingly whether mining tax revenues are being properly utilised will important issue. Here, experience to date about development become more important than the division of wealth between impacts is inconclusive, implying that there is no clear-cut companies and the state. finding for or against fiscal decentralisation. Nevertheless, it seems sensible for companies to cultivate constructive relations Paul Mitchell is Director of Mitchell McLennan Pty Ltd, a specialist with all tiers of government, and to encourage collaboration environment and planning consultancy in Australia and former and capacity-building for all relevant parties in proportion to President of the International Council on Mining and Metals (ICMM) their influence. and former Member of the EITI International Board. References Henderson Global Investors (2005),“Responsible Tax”.Henderson Global Investors ltd., london, uk, 2005. Humphreys, M., Sachs, J., and Stiglitz, J. (2007), Escaping the Resource Curse. Columbia university press, Ny. ICMM, World bank and uNCTAD (2008),“Resource Endowment Toolkit. The Challenge of Mineral Wealth”.ICMM london, www.icmm.com. Otto, J. (2005),“Mining Taxation”.unpublished presentation to World bank seminar, Washington DC. Otto, J., Andrews, C., Cawood, F., Doggett, M., Guj, p.,Stermole, J., and Tilton, J. (2006),“Mining Royalties: A Study of Their Impact on Investors, Government, and Civil Society”.World bank, Washington DC. ADVANCINGTHE EITI INTHE MINING SECTOR 31 MulTIlATERAl FINANCING TO THE MINING SECTOR ANDTHEEITI: ThE AFDB’S CASE ChRISToPhER WRIGhT1 background management. In 2004, an independent review of the World The extraction, processing and export of natural resources have bank’s support to the extractive industries – the Extractive the potential to be a significant source of economic growth in Industries Review – recommended that it should strengthen developing countries. but historically, natural resource governance systems before investing, and require project abundance, including mineral wealth, has paradoxically operators to obtain the free, prior and informed consent of undermined economic growth and development in most indigenous peoples and local communities before financing an developing countries.2 For multilateral development banks extractive investment.5 In response, the World bank committed (MDbs) engaged in the mining sector in developing countries, to work to make revenues more transparent both through it becomes critical to ensure that their financing discourages, projects and through support for broader initiatives (such as the rather than encourages, the various macro-economic and EITI), and while falling short of requiring“consent”,pledged to governance failures associated with the“resource curse”.3 This ensure that projects enjoy“broad community support”as a chapter will provide a case study of the African Development condition for investment.6 bank (AfDb) relevant to the mining sector as a means to identify At the inter-governmental level, numerous declarations of some of the challenges that may influence EITI implementation support for the EITI have been issued. In September 2008, the in the internal operations of MDbs. This entails designing uN General Assembly voted in favour of a resolution to policies and procedures which condition financing to private strengthen transparency in industry, taking note of the EITI as mining operators on the disclosure of revenue payments to one relevant initiative.7 Subsequently, a recent African union governments, and financing to governments on making their (Au) meeting of mining ministers encouraged all countries to revenue receipts from minerals extraction and production participate in the EITI.8 The G8 and its member countries have public. frequently called on MDbs to develop international standards Apart from the EITI, several other initiatives and directives, and codes to be voluntarily adopted by borrower countries, and pushed by civil society, call on MDbs to pay closer attention to provide technical assistance in support of EITI implementation.9 transparency when providing project financing to the mining (See box 1.) Moreover, in July 2008, the uS Treasury announced sector. Revenue Watch, the publish What you pay coalition, and the expansion of an existing uS legislative mandate which the Revenue Transparency project led by Transparency called on MDbs to select, structure, and design extractive International (TI), have all brought considerable attention to the industries projects so as to meet the criteria of demonstrating issue.4 In addition, local communities in host countries have that the country has in place functioning systems for accounting, demanded a greater share in the benefits of mines, and called auditing, verification and dissemination. (See box 2.) In addition, for more transparency and influence in licensing and revenue proposed legislation has been introduced in both the uS House 32 ADVANCINGTHE EITI INTHE MINING SECTOR of Representatives and the uS Senate that would require support for governments to expand the extraction, production, publicly listed extractive companies to disclose revenue and export of minerals. yet, despite their missions to promote payments to governments.10 As part of the latter, a sustainable development, there are many examples of congressional report was commissioned which recommended extractive industries projects, including mining, which have that the World bank and the regional development banks benefited from MDb support but failed to produce sustainable should step up their efforts on governance and anti-corruption benefits to host countries because of mismanagement and in countries with significant extractive industries.11 misappropriation of resource rents. While sound and transparent revenue management provides With the exception of the Inter-American Development bank the basis for people to benefit from the mineral wealth of their (IDb), all MDbs have subscribed to the EITI and its principles and country, an underlying premise of the analysis is that promoting serve as observers on its board.15 In doing so, they have pledged transparency also has a purely commercial justification, as to support the EITI in their respective borrower countries by evidenced by the number of signatories to the Investors’ encouraging governments to adopt the framework and provide Statement on Transparency in the Extractives Sector and technical assistance for capacity-building if needed. In general, corporate contributions to the GRI Mining and Metals Sector MDbs have established generic policies that identify the Supplement.12 Opacity can expose operators, and by extension benefits of transparency and good governance, and view investors, to reputational risks in cases where public frameworks such as the EITI as a complementary framework dissatisfaction with national governments fuels speculation that can help sharpen their focus and actualise these about the volume and use of revenues derived from mining commitments in the extractive industries, including mining. operations and results in illegitimate accusations against However, while a process of harmonisation in policy approaches responsible mining operators. In addition, transparency of seems to be taking place, more could be done to integrate the revenue payments is a critical aspect to securing a“social license EITI into lending and non-lending activities in the mining to operate”from local communities, reducing the risk that local sector.16 protests cause disruptions to the construction and operation Among the MDbs, the World bank is the most influential in of a mine.13 Moreover, transparency can also help reduce the the mining sector, by virtue of its financing volumes and its role political risks associated with a mining project as it provides the as an administrator of the Multi-Donor Trust Fund (MDTF) for basis for achieving a broad political consensus on revenue EITI. The fund was created to provide technical and financial allocations, reducing the likelihood that future governments assistance to countries implementing or considering find it necessary to renegotiate contracts, and thereby implementing the EITI, and makes EITI advisers and consultants undermine long-term financial plans for the project.14 available to governments to assist them in implementation, encourage the sharing of international best practices, and Multilateral financing to the mining sector provide grants to governments to help support EITI Given their public mandate and the nature of their operations, implementation. Several African countries have received MDbs are well positioned to undertake the necessary funding for EITI implementation, and have reported preliminary interventions that can enhance governance of extractive results back to the World bank. The International Finance industries and increase the positive development impact of Corporation (IFC), the World bank’s private sector lending arm, mining. In most low-income countries, multilateral financing has broken new ground by committing itself to require all the plays a critical role in mobilising additional capital from private investors it supports to make public their payments to investors and providing both financial and non-financial governments from their operations, regardless of whether the Box 1: G Action Plan Box 2: US legislative Mandate The German government opted for the promotion of good governance in When financing extractive industries projects, MDbs need to demonstrate Africa as the focus of the development policy outreach during its G8 that countries of operation have, or are in the process of establishing, presidency in 2007-8. In May 2007, the G8 finance ministers agreed an functioning systems for: action plan with finance ministers from South Africa, Nigeria, Ghana, (A) accurately accounting for payments for companies involved in the Cameroon, and Mozambique. extraction and export of natural resources; The section on“increasing accountability for revenues from extractive (b) the independent auditing of accounts receiving such payments and industries”stated: the widespread public dissemination of the findings of such audits; (A) We give our full backing to the EITI and support it in its efforts to and optimise its implementation and monitoring mechanisms and to (C) verifying government receipts against company payments including contribute to enhanced participation by all stakeholders. widespread dissemination of such payment information. (b) We encourage other resource-dependent countries and industries from the extractive sector, especially from emerging market Source: State Department, Foreign Operations, and Related Programmes economies, to participate in the EITI. Appropriations Act, 200, found in the Consolidated Appropriations Act, Source: G Action Plan for Good Financial Governance in Africa, May 1 200, Public law 110-11. 200. ADVANCINGTHE EITI INTHE MINING SECTOR 33 project was located in a non-implementing country.17 For each Box 3: AfDB’s private sector approvals in the mining sector, 200-0 Summary of project Information (SpI) disclosed during project • Guinea, Guinea Alumina, uS$200 million to majority owners GAC and preparation, the IFC identifies how EITI-related risks were bHp billiton assessed and whether the client will be obliged to disclose • DRC, The Tenke Fungurume project, uS$100 million to majority owners Freeport McMoRan and Tenke Mining (2007) material payments to host countries. This systematic approach is • Madagascar, Ambatovy Nickel project, uS$150 million to Sherritt a first among MDbs; however, the information often fails to Metals (2007) • Mozambique, Moma (titanium) in Mozambique, uS$40 million (2007) identify where and how the client will or should make such • Zambia, lumwana Copper project, uS$43 million to subsidiary of disclosures. Equinox Minerals (2006) A case study of the African Development bank capacity-building, and support for undertaking feasibility Established in 1964, the African Development bank Group is a studies. (See box 3.) multilateral development bank that provides debt financing and grants to African governments and private companies investing The AfDB’s policies towards the extractive industries in the region.18 It operates with three lending windows. The Since its inception, the AfDb has developed a number of sector African Development bank (ADb) raises capital from capital policies, strategies, and guidelines to guide its investments in markets to provide non-concessional loans to the region’s natural resources sub-sectors. However, due to a lack of a single middle-income countries, such as Gabon, Morocco, South Africa, policy that encompasses all categories of natural resources, and Tunisia. In contrast, the African Development Fund (ADF) AfDb’s activities in this broad area have not always been offers grants and interest-free loans with long maturities to the implemented in a coherent manner. To address this, the AfDb is low-income countries with limited access to long-term currently in the process of developing its Natural Resources financing from private sources. Similar to the World bank Management policy, which will outline a comprehensive Group’s International Development Association (IDA), the ADF is approach for its interventions in this sector in order to enhance periodically replenished by member countries. The third lending their effectiveness. As such, its current policies relevant to the window – the Nigeria Trust Fund (NTF) – is a special fund with a extractive industries are those considering the importance of remit similar to the ADF but operating with less concessional governance to public and private sector operations in general lending terms and a substantially smaller lending mandate. terms, and those identifying its environmental and social As part of its corporate plan, the AfDb has significantly standards and procedures. augmented investment flows to the private sector in recent prior to the late 1990s, the AfDb’s engagement with reforming years, growing seven-fold between 2004 and 2007.19 (See Figure national policies and laws governing the extractive industries 1.) A large part of this increase can be attributed to growth in was largely driven by economic and political imperatives financing to the extractive industries, including mining. Its associated with structural adjustment. The emphasis was put on financing operations to the mining sector consist of direct scaling back government ownership and regulation so as to investments to private mining companies to develop and make the mining sector attractive to foreign investors. In enhance productivity, technical assistance to governments for November 1999, it released a“Good Governance policy”(GGp), reflecting the growing attention given to the issue among Figure 1: AfDB Group – Total Private Sector Approvals, multilateral and bilateral donors. Overall, the GGp concluded 200-0 (in US$ millions) that governance issues had not been given“due priority and importance”,and stated,“it is time to tackle the issue of 1800 governance in a much more proactive, direct, and integrated 1600 manner”.20 Subsequently, in 2001, it released“Operational 1400 Guidelines for Good Governance”,and made the theme the 1200 central focus of its annual flagship publication, the African Development Report. 1000 The AfDb’s operational policies and procedures on 800 environmental and social assessment contain standards and 600 procedures directly relevant to the mining sector, but they do 400 not commonly address revenue transparency and management. 200 Its“Environmental and Social Assessment procedures”(ESAp), 0 which are due to be updated in 2009, include a requirement to 2004 2005 2006 2007 identify and assess national policies, laws, and regulations that address human rights, inequalities, primary education, Source: AfDB Compendium of Statistics on Bank Group Operations, 200, p. 1. preventive health care, and nutrition programmes, as well 3 ADVANCINGTHE EITI INTHE MINING SECTOR as the quality and capacity of government institutions and sector”.28 The AfDb’s“Corporate Governance Strategy”also administrative structures.21 Its“Environmental policy”pledges recommends that it should promote the establishment of support for“environmental control measures to reduce the integrated and coherent legislative and policy frameworks in adverse effects from industrial, mining, and energy resource and regional member countries, and support the introduction of utilisation projects”.22 Furthermore, it notes that sustainable basic standards of corporate social responsibility as part of development can be achieved only“where there is good corporate governance legislation and regulation.29 And in 2008, governance, including transparency, accountability, a it released the“Governance Strategic Directions and Action plan participatory approach, and decentralisation”.23 While the AfDb (GAp) 2008-2012”,which charted the AfDb’s medium-term does not have a full range of thematic sustainability policies approach to addressing governance in its lending and akin to the IFC’s“performance Standards”(and by extension the non-lending activities, including mining.30 adoptees of the Equator principles), it has developed policies in a few areas relevant to mining, including involuntary Challenges to implementing the EITI in internal resettlement.24 In addition, the AfDb operates with eleven operations guidelines for addressing environmental and social impacts in Most of the AfDb’s project-level financing to the mining sector is projects across various sectors such as water, agriculture, channelled to private mining companies. Similar to other MDbs, power/dams, and roads. In 2009, it plans to develop an the AfDb operates with a formal project cycle that defines the operational guidance note for the sound and transparent process through which investment projects are identified, management of extractive industries projects as a supplement selected, reviewed, and approved. Generally, the main to the NRMp. responsibilities for preparing project documentation for private In 2005, Mr. Donald kaberuka assumed the presidency of the sector projects and managing the internal review process lie AfDb and identified the promotion of good governance and with sector departments (of which one is in charge of all private combating corruption as central elements of a new distinctive sector operations) charged with identifying, preparing and role for the bank within the global financial architecture.25 In implementing projects across industry sectors. In terms of 2006, it committed to provide EITI implementation support to private sector operations, the purpose of other departments, selected regional member countries, and established the OSGE including those with environmental, social, and governance – an internal department charged with strengthening capacity expertise, is to review project documentation and identify any to improve governance at the country level.26 The OSGE also outstanding issues that have not been satisfactorily addressed.31 assists the development of the extractive industries by As such, their role in the project cycle is to support the private providing country-level support to implement economic and Sector Department by ensuring that projects comply with the financial reforms through policy-based operations, as well as operational policies and fulfil the AfDb’s overall mandate. through institutional support projects. For example, in 2008, As noted above, the AfDb has recently issued a host of it provided financing in support of EITI implementation in policies and strategies that emphasise the need to more botswana, Central African Republic, liberia, and Madagascar. systematically consider governance risks in private sector Moreover, the AfDb has worked to establish an African legal operations. With regard to implementing these in internal Support Facility to provide technical support to regional operations, decisions regarding the AfDb’s lending and member countries for undertaking reviews of legal systems and non-lending activities in the mining sector largely depend on preparing new laws and regulations in support of transparent the outcomes of a series of internal review, approval, and and accountable natural resource management. In addition, the clearance processes, in which staff outside of the private Sector facility would support capacity-building for legal and financial Department review project documentation and provide input. advisers in preparing and negotiating contracts with private For example, project documentation is systematically reviewed mining operators. and cleared during the project cycle by a senior-level Operations Consistent with its mandate to support development Committee to ensure that they comply with internal policies financing in resource-rich countries, the AfDb set up an internal and review procedures. In addition, Country Teams consider cross-departmental Task Force Regarding bank Engagement in whether projects under review fit the priorities laid out in the Extractive Industries, to review the AfDb’s prior involvement country strategies, and a Quality Assurance and Results with financing extractive industries projects in regional member Department undertakes a readiness review of project countries.27 In an honest assessment of past failures, it concluded documents against a checklist. Similar to other MDbs, all that, historically,“extractive industries in Africa have been projects are subject to board approval, which means that the tainted by human exploitation, environmental destruction, civil nature of AfDb involvement in the mining sector in large part war, economic imbalance, and governmental destabilisation”, reflects the interest of shareholder governments. and recommended that the AfDb“develop a corporate strategy The AfDb’s experience with private sector mining projects for its increased engagement in the extractive industries reveals three distinct challenges to implementing the EITI in ADVANCINGTHE EITI INTHE MINING SECTOR 3 internal operations, which may be indicative of those facing field missions to project sites, provides an obstacle to more MDbs more generally. systematically addressing the governance context of mining First, while staff from other departments are involved in the projects under consideration. However, to support this effort, project cycle, primary responsibilities for structuring the AfDb’s it is in the process of developing a framework and tool-kit to private sector lending activities rest with the private Sector assess and address governance and corruption risk in sectors in Department. by implication, the systematic integration of general and across sectors, including the extractive industries. governance concerns into mining projects depends on greater collaboration between the operational staff in the private Sector Conclusion: strengthening multilateral support for Department in charge of project preparation and governance sustainable mining specialists in other departments with expertise in revenue The AfDb is well positioned to promote revenue transparency transparency and management. In the case of the AfDb, the and management in the mining sector in African countries. Its project cycle does include various internal reviews of project support for the EITI, the release of the GAp 2008-12, and the documentation that provide governance specialists with an upcoming publication of a Natural Resources Management opportunity to consider whether governance risks have been policy, all point to a growing commitment among senior adequately addressed in project documentation. yet, current management for the need to more strongly address governance review procedures do not ensure that governance risks are issues in private sector operations. Moreover, the AfDb is in given special attention in the context of the extractive the process of scaling up its support for transparency and industries. More broadly, it remains a challenge to design and accountability in the management of public resources, including implement processes that make use of the knowledge of natural resources, and increasing its support for strengthening governance specialists earlier in the project cycle, in order audit and accounting capacities in several African countries. to make the integration more efficient and effective. This includes providing technical and financial assistance for Secondly, EITI implementation would also benefit from countries that are implementing the EITI. Furthermore, to changes to internal log frames and project assessment translate policy commitments into changes in internal practices, methodologies. In the case of the AfDb, reporting templates the AfDb plans to produce distinctive staff guidance notes for for project documents consider governance issues largely as each category of natural resources that will identify how its staff additional items of information, rather than a critical part of the can ensure sound and sustainable management of the natural project design. This is particularly problematic in relation to resource sectors in the bank’s lending operations, particularly in mining projects, as the absence of strong governance systems at private sector operations. the time of investment can severely undermine development However, for the AfDb and the multilateral sector as a whole, outcomes.32 Moreover, while the AfDb requires internal ex-ante it remains a challenge to restructure internal operations so as to assessments of development outcomes for all projects, these are ensure that investments in mining contribute to sustainable not commonly conducted by staff with significant governance development. This means assisting countries to develop strong expertise and do not include indicators directly related to systems of governance for managing resource rents prior to the revenue transparency and management. The AfDb is currently disbursement of financing. Internally, implementing the EITI in experimenting with an ex-ante Additionality and Development mining operations requires new mechanisms, procedures, and Outcome Assessment (ADOA) conducted by the Office of the structures that improve coordination between professional staff Chief Economist late in the project cycle, and meant to induce engaged in private sector operations and public sector reform, operational staff to select projects more aligned with its and embed mining investments in broader national mandate to alleviate poverty. However, the current development plans. This not only points to the integration of methodology does not directly assess governance issues. analysis across different disciplines (political science, economics, Thirdly, assessing a country’s legal and regulatory framework and finance), but also across different levels of analysis and capacity for managing revenues from mining projects is (project-level, sector-level, and country-level).33 In addition, both time-consuming and resource-intensive. While borrowers new metrics may need to be added that do not simply measure commonly assume the cost of undertaking environmental and the volume of resource rents flowing to governments but also social assessments, they are not expected to (nor likely willing consider whether governments use them to promote long-term to) finance impact studies evaluating the national governance sustainable development. context (in specific sectors) and identifying how lenders can More broadly, the boom in commodity prices and the make improvements. Therefore, funding such work depends to a growing demand for minerals provided favourable economic large extent on donor funds, which are not always readily conditions for resource-rich countries to develop their mining available for these specific purposes. In the case of the AfDb, sectors. Amid this expansion, there was growing pressure on the shortage of available capacity and funds for undertaking MDbs to address the macro-economic and governance failures governance studies, and including governance specialists on associated with the‘resource curse’.Moreover, the more recent 3 ADVANCINGTHE EITI INTHE MINING SECTOR decrease in commodity prices has likewise raised the Notes importance of managing scarce resources wisely. Indeed, 1 This chapter has been commissioned by the African Development the demand for greater attention to these issues comes from bank’s Governance, Economic and Financial Management Department (OSGE) with support from the AfDb–DFID Trust Fund on Governance. resource-rich countries in need of capacity and resources to The lead author is Dr. Christopher Wright, Research Fellow at the implement the EITI. As the interests among donors for london School of Economics (lSE) and Visiting Researcher, Centre for supporting the natural resources sector continue to grow, Development and the Environment (SuM), university of Oslo, under the greater coordination between MDbs is critical to ensuring guidance of the African Development bank’s Extractive Industries uniform and effective implementation of the EITI in Working Group. However, the views expressed herein do not necessarily resource-rich countries. Currently, all MDbs that support the reflect those of the AFDb’s boards of Directors or the countries they represent. EITI claim to address it in negotiations with private mining companies (and governments, in the case of public sector 2 See palley, Thomas I. (2003), “lifting the Natural Resource Curse”, operations) in EITI-implementing countries. However, practice Foreign Service Journal, pp. 54-61; Sachs, J. and Warner, A. (2005), “Natural Resource Abundance and Economic Growth”,NbER Working in non-EITI countries diverges, and remains somewhat unclear, paper 5398 (Cambridge, Massachusetts: National bureau of Economic with some being hesitant to make compliance with a voluntary Research); Iimi, A. (2006),“Did botswana Escape from the Resource framework mandatory. The AfDb evaluates the need to comply Curse?”,IMF Working paper, African Department, Wp/06/138; Easterly, with EITI standards on a case-by-case basis, and claims it will W. and levine, R. (1997),“Africa's Growth Tragedy: policies and Ethnic insist on compliance in resource-rich countries with governance Divisions”,Quarterly Journal of Economics, Vol. 112, Issue 4, November issues, even if they are not implementing the EITI.34 Given these 1997. disparities, it is therefore encouraging that MDbs recently 3 For some policy recommendations, see Collier, p. and Venables, T. agreed to harmonise their initiatives in the area of transparency (2008), “Managing resource revenues: lessons for low income countries”, and the extractive industries.35 As part of the process, MDbs will presented at the African Economic Research Consortium 2008 Annual Conference, Nairobi. hold a meeting in 2009 to take the agenda forward, and, in a process led by the IFC, discuss a coordinated response to the uS 4 See also, “Assessment of International Monetary Fund and World bank Congress on recent legislative initiatives on transparency in the Group Extractive Industries Transparency Implementation”, bank Information Centre and Global Witness, October 2008. extractive industries sector. 5 “Striking A better balance – The World bank Group and Extractive Industries: The Final Report of the Extractive Industries Review (EIR)”, Dr Christopher Wright is Research Fellow, Grantham Institute on January 2004. Climate Change and Environment, London School of Economics (LSE) 6 and Visiting Researcher, Centre for Development and the Environment “Striking A better balance – The World bank Group and Extractive Industries: The Final Report of the Extractive Industries Review (EIR) – (SUM), University of oslo. World bank Group Management Response”, September 2004. 7 uN Resolution GA/10740 on “The Transparency of Industry”, document A/62/l.41/Rev.1. 8 Report of the Conference of Ministers, African union (Au) Conference of Ministers responsible for mineral resources development, 1st ordinary session, 13-17 October 2008, /RpT (I), Addis Ababa, Ethiopia. 9 G8 Hokkaido Toyako Summit leaders Declaration, Hokkaido Toyako, 8 July 2008. Date of Access: 15 December 2008. http://www.g8summit.go.jp/eng/doc/doc080709_01_en.html . 10 HR 6066, Extractive Industries Transparency Disclosure Act, 110th Congress, Second Session, 13 May 2008; and S.3389, The Extractive Industries Transparency Disclosure Act, 110th Congress, Second Session, 31 July 2008 11 “The petroleum and poverty paradox: Assessing u.S and International Community Efforts to Fight the Resource Curse”, Report to the Members of the Committee on Foreign Relations, united States Senate, 110th Congress, Second Session, 16 October 2008. 12 “Investors' Statement on Transparency in the Extractives Sector”, December 2007; “GRI Mining and Metals Sector Supplement” (pilot Version 1.0), Global Reporting Initiative (GRI), February 2005. 13 Mining and Critical Ecosystems: Mapping the Risks, by M. Miranda, p. burris, p. Shearman, J.O. briones, A. la Vina, and S. Menard, World Resources Institute (WRI) 2003. ADVANCINGTHE EITI INTHE MINING SECTOR 3 14 “Africa set to strip Western giants of mining rights”, Nick Mathiason, 31 The AfDb currently operates with nine sector departments: The Observer (uk), 28 January 2007. Agriculture and Agro-industry (OSAN), Human Development (OSHD), Governance, Economic, and Financial Management (OSGE), Fragile 15 Official statements of support for the EITI. Date of Access: 18 States (OSFu), Gender, Climate, and Sustainable Development (OSuS), December 2008. Asian Development bank (ADb), Infrastructure (OINF), private Sector (OpSM), Water and Sanitation http://www.adb.org/Governance/EITI.asp; European bank for (OWAS), and NEpAD, Regional Integration, and Trade (ONRI). Reconstruction and Development (EbRD), www.ebrd.com/about/policies/sector/nateiti.htm; European 32 “Striking A better balance - The World bank Group and Extractive Investment bank (EIb), Industries: The Final Report of the Extractive Industries Review (EIR)”, http://www.eib.org/projects/news/eib-support-for-the-extractive-indu January 2004. stry-transparency-initiative.htm; AfDb, 33 In part to overcome this challenge, the World bank Group created an http://www.afdb.org/portal/page?_pageid=473,30724413&_dad=port entirely separate division for the extractive industries – the Oil, Gas, al&_schema=pORTAl. Mining and Chemicals Department (OGMC) – which embeds the private 16 For example, a recent report on the World bank’s practices observes sector operations of the International Finance Corporation (IFC) with that the disclosure of contracts associated with extractive industries the public sector specialists of the World bank. projects is highly variable, and it is identified as a programme 34 However, it may allow for exceptions in cases where countries are not benchmark in only 19% of country lending programmes and in 21% of yet implementing the EITI but are generally recognised as having country strategies in resource-rich countries. See “Assessment of strong systems of laws and regulations, or in countries that are not by International Monetary Fund and World bank Group Extractive definition “resource rich” and thus not expected to implement the Industries Transparency Implementation”, bank Information Centre and Initiative. Global Witness, October 2008. 35 The agreement was reached at a meeting convened by the EITI 17 “policy on Social and Environmental Sustainability”, International between MDbs held in conjunction with the 13th International Finance Corporation (IFC), Section III.22. Anti-Corruption Conference (IACC) in Athens, Greece, 29 October- 18 For more on its organisational structure and governance, see Annual 3 November 2008. Report 2007, African Development bank (AfDb), p. xi, and www.afdb.org. 19 Annual Report 2007, African Development bank (AfDb), p.22 20 “bank Group policy on Good Governance”, Central Operations Department (OCOD) at the African Development bank, November 1999, p.i. 21 “Environmental and Social Assessment procedures for the AfDb’s public Sector Operations”, June 2001, Annex 2, p. 23. 22 “African Development bank Group’s policy on the Environment”, private Sector Development unit (pSDu), February 2004, p.25. 23 “African Development bank Group’s policy on the Environment”, private Sector Development unit (pSDu), February 2004, p.26. 24 “Involuntary Resettlement policy”, African Development bank (AfDb), November 2003. 25 “Governance Strategic Directions and Action plan 2008-2012”, AfDb Governance, Economic, and Financial Management Department (OSGE), 17 April 2008. 26 The Governance, Economic, and Financial Management Department. (OSGE) 27 “Report of Task Force Regarding bank Engagement in the Extractive Industries”, African Development bank, October 2007. 28 “Report of Task Force Regarding bank Engagement in the Extractive Industries”, Executive Summary, p. 1, African Development bank, October 2007. 29 “Corporate Governance Strategy”, African Development bank, July 2007. 30 “Governance Strategic Directions and Action plan 2008-2012”, AfDb Governance, Economic, and Financial Management Department (OSGE), 17 April 2008. 3 ADVANCINGTHE EITI INTHE MINING SECTOR EITI – ONE OF MANy EFFORTS: oThER INITIATIVES FoR ThE ExTRACTIVE SECToR JoNAS MoBERG, JUAN CARLoS QUIRoz and MAAIKE FLEUR1 Introduction even particular minerals. One example is the kimberly process, This chapter provides an introduction to the context in which which traces the trade in rough diamonds. Other initiatives the EITI operates and how it fits into the broader array of efforts concern general corporate accountability and social currently in practice or in development that are relevant to the responsibility and, while not mining industry-specific, many extractive sector. As a multi-stakeholder initiative, the EITI mining companies have joined them. An example here is the uN benefits its constituencies in different, though complementary, Global Compact. Additionally, the World bank has and continues ways. It is therefore important to understand how different to play an important role in supporting client countries with groups benefit from the EITI and how it relates to other expertise and advice on transparency and governance issues. initiatives, in order to ensure that complementarity is achieved In the last decade, the demand for higher standards of and that a duplication of efforts is avoided. transparency and accountability in the mining sector has gained This chapter introduces some of the most important momentum with governments, companies and international initiatives relating to the EITI which are aimed at improving finance and development institutions. As a result, a number of governance and sustainability in the mining sector. Some of initiatives have been developed in order to achieve these higher these initiatives focus on the mining industry specifically and standards. Some of these are simply platforms for sharing good “beyond the intergovernmental system, a new form of soft law initiatives is emerging. Most prominent among them are: the Voluntary principles on Security and Human Rights (Vps), promoting corporate human rights risk assessments and training of security providers in the extractive sector; the kimberley process Certification Scheme (kimberley), to stem the flow of conflict diamonds; and the Extractive Industries Transparency Initiative (EITI), establishing a degree of revenue transparency in the taxes, royalties and fees companies pay to host governments. . . . they allocate shared responsibilities and establish mutual accountability mechanisms within complex collaborative networks that can include any combination of host and home states, corporations, civil society actors, industry associations, international institutions and investor groups. These hybrids seek to enhance the responsibility and accountability of states and corporations alike, by means of operational standards and procedures for firms, often together with regulatory action by governments, which are both supported by transparency mechanisms.” Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, February 200, page 1. ADVANCINGTHE EITI INTHE MINING SECTOR 3 practices based on agreed principles of intention, but without World Bank involvement mechanisms for holding companies or governments to account. Developing countries rich in natural resources have long worked Other initiatives, such as the EITI, employ a soft law approach with the World bank and other development institutions in with relatively detailed sanctions and grievance mechanisms. improving natural resource management. An important process Not covered in this chapter are the many legislative and other by the World bank was its Extractive Industries Review, efforts undertaken by governments to ensure that mining announced in 2000 and led by Dr Emil Salim. under the auspices activities are conducted in a responsible manner and with of this review, a range of initiatives was considered and transparent revenue flows.2 stakeholders consulted. The World bank Group board noted Concerns over the economic, social and political impacts when it considered the Review’s outcomes in 2004 ”.. . that of mining go beyond issues of financial disclosure. Mineral- while extractive industries’investments can contribute to producing countries, too, often suffer from corruption, sustainable development, the WbG [the World bank Group] economic mismanagement, civil conflict, human rights abuses, should further enhance its efforts in several areas: more and environmental degradation that revenue transparency explicitly identifying and tracking poverty reduction associated efforts alone cannot address. In addition to the EITI, the with its projects; the overall quality of governance in host international community has responded to these problems countries; broader inclusion of local stakeholders; transparency with a number of governance-related initiatives that provide of revenue management and project documents; and the guidelines and standards for extractive companies and promotion of renewable energy and cleaner fuel alternatives”. governments. Many of the efforts led by implementing countries are, like The list of individual or collective efforts surveyed here is the EITI, addressing sector-specific challenges. One such in no way exhaustive. This chapter aims to highlight those initiative is the Communities and Small-Scale Mining (CASM). initiatives closer to the mining sector and most relevant to the With an estimated 13 to 20 million people, many of whom are EITI core principles. Additionally, the chapter will include a children, working as artisanal and small-scale miners, it is an detailed case study of the Global Reporting Initiative's (GRI) important development challenge to address their needs. efforts to develop a mining industry-specific supplement to CASM was launched by the World bank and others to address complement their general reporting guidelines. the complex social and environmental challenges facing artisanal and small-scale mining communities. The World bank Implementing countries and other development actors such as the uk Department for For implementing countries, the EITI often sits alongside other International Development also seek to improve dialogue government-led efforts to ensure that it manages the country’s between governments through the Intergovernmental Forum natural resources well. These efforts are often led by the mining on Mining, Minerals, Metals and Sustainable Development. ministry or other government authorities overseeing mining As a major provider of funds for large development projects, activities. From an EITI-implementing country perspective, including mining projects, the World bank developed Safeguard the EITI often forms part of broader budget and financial policies to eliminate or mitigate the social and environmental transparency reforms. Such reforms tend to be overseen by harm these projects might create in the absence of effective ministries of finance. protection measures. The Safeguard policies cover a broad range of issues including environmental assessments to take into The Kimberley Process account natural habitats, forests, proper pest management, The kimberley process Certification Scheme is similar to the EITI guidelines for involuntary resettlement, and safety in that it is also a government-led multi-stakeholder initiative. requirements for dams. It imposes extensive requirements on its members to trace and In addition to the Safeguard policies, the World bank Group certify the origins of traded rough diamonds to ensure they do has strict information disclosure policies, which, since 2004, not come from conflict zones. The disclosure of statistical data include a requirement for revenue transparency for all new regarding the import and export of rough diamonds is at the projects. Though the World bank Group includes the heart of the kimberly process. by tracing the origination of International Finance Corporation (IFC), there are some diamonds and their flow to markets, diamonds are certified differences in policy due to the IFC’s role as investor in private as“conflict-free”.It is a voluntary initiative that involves ventures. The IFC’s policy states that“clients of all IFC-financed governments, industry and civil society in the implementation extractive industry projects [should] publicly disclose their and certification process. The success of this initiative, which at material payments from those projects to the host governments”. its core is founded on the transparency of statistical information and multi-stakeholder oversight, is reflected by the fact that Supporting countries conflict diamonds are now only a fraction of 1% of the world Countries supporting the EITI often do so as part of their diamond trade, down from 15% in the 1990s. broader development policies, and involvement may come 0 ADVANCINGTHE EITI INTHE MINING SECTOR through a development ministry. In such circumstances, the measures to control sustainability risks as a condition of listing. EITI may receive support alongside, for example, the CASM. Initially, a company's reporting was focused mainly on In other cases, involvement is part of efforts to create an environmental issues surrounding their operations. Over time enabling environment for corporate citizenship. In such these reports developed and expanded to include issues circumstances, involvement with the EITI may be alongside the relating to poverty, health and human rights. Demand from Voluntary principles, the kimberley process, or with the uN consumers and company shareholders slowly grew and put Special Representative on business and Human Rights, John pressure on companies to go beyond simple public relations Ruggie. In these circumstances, it is more likely to be a foreign, exercises to more robust reporting on a company's social and or possibly trade, ministry that is working with the EITI. environmental practices. Issues relating to good governance are perhaps the latest development in company reporting, as Supporting companies corruption is being seen as a major impediment to In 1999 nine of the world’s largest mining companies launched development. the Global Mining Initiative (GMI), in preparation of the World The increase in reporting has been facilitated by the Summit on Sustainable Development in 2002. The GMI intended emergence of multi-stakeholder efforts such as the Global to look at the broader societal impact of mining operations. Reporting Initiative (GRI), aiming at creating standardised This later led the International Institute for Environment and approaches for companies to report on the economic, Development to undertake the comprehensive Mining, Minerals environmental, and social dimensions of their activities, and Sustainable Development project (MMSD). This extensive products, and services. Recognising the importance reporting research and consultation exercise coincided in 2001 with the has in ensuring corporate transparency, this chapter includes a industry deciding to establish the International Council on case study on the GRI’s efforts to tailor their reporting guidance Mining and Metals (ICMM).3 The ICMM, along with many of to mining companies. its members, are supporters of the EITI, and commit to ten principles for sustainable development. Just as with the uN Civil society Global Compact, support for the EITI can be seen as a concrete Alongside the EITI, publish What you pay (pWyp) has been a action to support the broader context of sustainable prominent advocate of greater revenue transparency in the development. mining sector. The EITI and pWyp both support voluntary EITI support by companies tends to be part of wide-ranging approaches to extractive revenue transparency, but pWyp efforts to ensure that they conduct their business operations also promotes mandatory approaches including accounting in an efficient manner while at the same time being good standards and stock exchange listing requirements. corporate citizens. For them, supporting the EITI can be an The Revenue Watch Institute (RWI),4 another strong supporter of illustration of their broader commitment to the uN Global the EITI, is also focusing on transparency in the extractive sector. Compact and its tenth principle, relating to fighting corruption. In collaboration with Save the Children and Transparency As an issue-specific initiative, the EITI has, from a corporate International they have developed the project“promoting perspective, extensive similarities to the Voluntary principles on Revenue Transparency”to assess transparency in extractive Security and Human Rights. The Voluntary principles process companies. A report was launched in 2008 ranking oil and gas was an important catalyst in creating the multi-stakeholder companies, and the analytical framework is being expanded to coalition that grew into the EITI. Many of the companies include more countries and the mining sector in future reports. supporting the EITI also support the Voluntary principles. Environmental and human rights issues related to mining The Voluntary principles guide extractive companies in have been extensively covered by numerous organisations and maintaining safety and security in their operations while initiatives. New mechanisms are continuously being developed ensuring respect for human rights and fundamental to comprehensively tackle the multitude of issues surrounding freedoms in the places where they operate. the mining sector. The Framework for Responsible Mining (FRM) Communicating and reporting becomes an integral part is a case in point. It is part of an ongoing multi-stakeholder of a company’s efforts to be transparent and accountable. effort to define responsible mining practices. The framework, The sustainable development or corporate social responsibility which is still at draft stage, aims to provide a best-practice (CSR) reports that many public and private companies now reference for discussions among stakeholders interested in routinely produce are a reflection of this. Although this kind of improving the mining sector’s performance with regards to non-financial reporting is essentially voluntary, there has been a environmental, human rights and social issues. The FRM also rapid qualitative progression from early reporting efforts in the attempts to unify civil society’s approach towards improving 1990s. In addition to rising stakeholder expectations, some mining standards based on existing initiatives, including the stock exchanges (e.g. the london Stock Exchange) have Global Reporting Initiative, the uN Global Compact, the EITI, provided further impetus by requiring public reporting on and publish What you pay. ADVANCINGTHE EITI INTHE MINING SECTOR 1 The FRM emphasises the need to streamline transparency by providing a trusted and credible framework for sustainability and accountability as core principles for mining activities. The reporting that can be used by organisations of any size, sector, framework supports independent monitoring and oversight as a or location. means of ensuring accountability, as well as promoting a more Today, the GRI’s latest version of the Sustainability Reporting effective use of public resources. Although the framework is still Guidelines – G3 – provides the world’s most widely used a work in progress, civil society organisations have embraced it framework for sustainability reporting. The GRI G3 Guidelines as a way to strengthen sustainability and good governance in contain principles and guidance as well as standard disclosures. the mining sector. These add up to a disclosure framework that organisations can voluntarily, flexibly, and incrementally adopt. The Guidelines are CASE STuDy: Mining in the Global Reporting Initiative made freely available as a public good for companies and other (GRI) organisations globally. The GRI Similarities and differences between the EITI and the GRI GRI reporter both the Global Reporting Initiative (GRI) and the Extractive A company can use the GRI guidelines in various ways. Some Industries Transparency Initiative (EITI) are tools for voluntary companies only make a reference to the Guidelines in the text disclosure. The GRI was started in 1997 and officially inaugurated of their sustainability report. However, the Guidelines advise as an independent body in 2001; the EITI was first announced by companies to include a GRI content index in the report, to refer Tony blair in 2002 and officially launched in london 2003 at the to the pages or location where information corresponding to first EITI plenary Conference. like the EITI, the GRI is centred on GRI indicators can be found, and to state a level of application. transparent multi-stakeholder decision-making processes. For its own statistics, the GRI only counts the reports in which both initiatives are global in nature, but while the EITI both a GRI content index and an application level are declared. advances transparency in public payments of the extractives The table below shows the extent of reporting against the G3 industries per country of operation, the GRI advances Guidelines for each of the GRI self-application levels. corporate-level transparency on sustainability topics including economic, environmental and social performance in all types of Supplements companies and organisations in all sectors. The aim of the GRI is Some sectors face unique needs that require specialised to ensure that public reporting on these issues becomes as guidance in addition to the universally applicable core common as financial reporting. guidelines. Sector Supplements respond to these needs and constitute a key part of the Reporting Framework. A reporting framework Sector Supplements hold sector-specific reporting guidance To communicate clearly and openly about sustainability, a integrated in the Guidelines. This is to provide companies in the globally shared framework of concepts, consistent language, sector with one document that holds both the general guidance and metrics is required. It is the GRI's mission to fulfil this need and the sector-specific guidance. The sector-specific content in a Report Application level C C+ B B+ A A+ Report on: Report on all criteria listed Same as requirement 1.1 for Level C plus: for Level B G3 Profile 2.1-2.10 1.2 disclosures 3.1-3.8, 3.10-3.12 3.9,3.13 4.5-4.13,4.16-4.1 OUTPUT Not required Management approach Management approach disclosures for each disclosures for each G3 Management Indicator category Indicator category approach disclosures OUTPUT Report externally assured Report on a minimum of Report externally assured Report on a minimum of Report on each core G3 Report externally assured 10 Performance Indicators, 20 Performance Indicators, and sector supplement* G3 Performance including at least one from at least one from each of: Indicator with due regard STANDARD DISCLOSURES Indicators and each of: economic, social economic, environmental, to the Materiality Principle sector supplement and environmental. human rights, labour, society, by either a) reporting on the Performance Indicators OUTPUT product responsibility. Indicator or b) explaining the reason for its ommission. * Sector supplement in final version 2 ADVANCINGTHE EITI INTHE MINING SECTOR Supplement usually contains an introduction, sector-specific Committee. The three-month comment period will end in the commentaries to Guideline disclosures, and new sector-specific second quarter of 2009, after which the Working Group will disclosures. The Supplement developed for the mining and review the comments and make decisions on a final version of metals sector was published in 2005. the GRI Mining and Metals Sector Supplement. The GRI and the ICMM are aiming for a life span of at least five Development of the Pilot GRI Mining Supplement years for the Mining and Metals Sector Supplement. In 2004 the GRI convened a multi-stakeholder Working Group with the ICMM as co-convening partner. In a series of meetings The EITI in the Mining Supplement the GRI Mining and Metals Working Group developed a draft When GRI started the development of the Mining and Metals which was posted for public comment. Numerous comments Sector Supplement back in 2004, the EITI was still in its early were received. set-up phase. but even at that stage the Working Group The GRI Mining and Metals Sector Supplement was released discussed whether a reference to EITI should be made. At the in October 2005. time it was decided not to make a reference, due to the early phase of the EITI’s set-up at the time. Use of the Mining Sector Supplement EITI Criterion 1 asks companies to regularly publicise all The GRI found 18 mining and metals company sustainability material payments to governments but does not stipulate any reports referring to the pilot Sector Supplement in their GRI further. Specifically, it does not prescribe the need for content index, in July 2007. The quality of the reports and the disaggregated information. Quite a few G3 reporting indicators quantity of indicators was not assessed. but in a survey are linked to the information that an EITI-supporting company conducted by SD3 and ICMM later that year, opinions were can use to report to the national government in the country of collected on the quality of the reporting indicators in the operation. Supplement. This survey revealed that while some mining While the final GRI Mining and Metals Sector Supplement is specific indicators were perceived as useful in helping mining still under development, the draft for public comment makes companies to improve their sustainability reporting and clear reference to, and even asks for information on, which performance, other reporting indicators in the supplement had countries of operation are subscribers to the EITI. room for improvement. using this feedback, the ICMM and GRI The mining-specific reference to the EITI is made at G3 formed a new Working Group to develop the pilot version of the indicator EC1:“Direct economic value generated and mining supplement into a final version. distributed, including revenues, operating costs, employee Development of the GRI Mining Supplement Final compensation, donations and other community investments, The new Working Group members were surveyed for their retained earnings, and payments to capital providers and opinions on the mining-specific indicators and content in the governments.” pilot version of the mining supplement. A consultant brought all In the indicator protocol compilation section, the mining and these opinions together and produced a draft final version in metals commentary reads:“report countries of operation that line with the G3 Guidelines. This draft final version was are subscribers to the Extractive Industries Transparency discussed and further developed in a two-day meeting in Initiative (EITI)”.This reference to the EITI is likely to stay in the October 2008. The group agreed on a final draft for public final GRI Mining and Metals Sector Supplement. comment, which was approved by the GRI Technical Advisory GRI Mining and Metals Working Group 200/200 GRI Mining and Metals Working Group 200/200 G Alcoa of South Africa G Ambatovy Nickel and Cobalt General Workers’unions (ICEM) G Anglo American G Newmont Mining Corporation project G International union for the G G bHp billiton G Noranda Inc / Falconbridge Anglo American Conservation of Nature (IuCN) G G G Council for Responsible limited bHp billiton National union of Mine Workers G Jewellery practices G Oxfam International G Centre for Human Rights and South Africa G G First point Minerals Corporation G placer Dome (now barrick Gold) Environment Newmont Mining G G G Henderson Global Investors G Rio Tinto European Nickel plC Rio Tinto G G (now Abp) G Standard life Investments First peoples Worldwide Standard life Investments G G G IFC / World bank Group G Sumitomo Metal Mining Flora and Fauna International Teck Cominco G G G IuCN Southern Africa G umicore Goldman Sachs Vale programme G G G World Wildlife Fund International Federation of World bank G National union of Mineworkers Chemical, Energy, Mine and ADVANCINGTHE EITI INTHE MINING SECTOR 3 EITI reporting topics in the GRI G3 guidelines COMPANY NAME The EITI and the GRI have overlap on a number of indicators, as EITI supporter in all extractive sectors Type of corporate shown in box 4. (as of 15 October 2008) sustainability report Alcoa G3 undeclared EITI supporters and GRI reporters Anglo American G3 A + AngloGold Ashanti G3 A + The EITI is implemented by governments, who then ask mining Areva Activity and Sustainable companies to disclose payments to them. For the purpose of Development Report – GRI this article, the GRI listed the EITI supporters and checked reference whether these companies are GRI reporters, and if so, at which barrick Gold G3 A + bG Group G3 undeclared application level of transparency. bHp billiton G3 A + In the global mining and metals sector, 11 of the top 20 bp G3 A + largest mining companies (as defined by Forbes) are EITI Chevron Corporation G3 undeclared supporters and 13 of the top 20 are GRI reporters. Only two of Conocophilips G2 undeclared Debeers G3 A + the top 20 largest companies in this sector are a GRI reporter but Eni G3 undeclared not officially a supporter of EITI. ExxonMobil G3 undeclared As of 15 October 2008, 39 EITI company supporters were Freeport-McMoRan Copper and Gold G2 In Accordance identified from the EITI website. Of the 36 EITI company Gold Fields G2 CI Hess Corporation G3 b + supporters, three are non-GRI reporters; all others report with katanga Mining limited Corporate Responsibility the GRI and 14 report with the GRI Guidelines on the highest section on website level of transparency (self-application level A). Half these lonmin G3 C companies are in the mining and metals sector and the other Marathon G3 undeclared Mitsubishi Materials G2 CI half in the oil and gas sector (as defined by Forbes). Newmont G3 A + Of the 63 known GRI 2007 reporters (known by GRI at Nippon Mining and Metals Sustainability Report 15 October 2008) in the mining and metals sector, 15 Norsk Hydro G3 b + companies are supporting the EITI. This shows that almost all OZ Minerals G3 b (Oxiana) EITI supporting companies are GRI reporters, but only a quarter pemex G3 A + petrobras G3 A + of the GRI reporters in the mining and metals sector are formal Repsol ypF G3 A + EITI supporters. Rio Tinto G3 A + Shell G3 A + StatoilHydro G2 CI Sumitomo Metal Mining G2 CI Talisman Energy G3 A + Teck Cominco G3 b TOTAl G3 undeclared Woodside G3 C xstrata G3 A + Box . EITI Criteria for supporting companies GRI G3 indicator reference 1 Regular publication of all material oil, gas and mining payments by companies to governments (“payments”) and all material revenues received by governments from oil, gas and mining companies (“revenues”) to a wide audience in a publicly accessible, comprehensive and comprehensible manner. EC1, EC4, EC8, SO6, pR9* 2 Where such audits do not already exist, payments and revenues are the subject of a credible, independent audit applying international auditing standards. 3 payments and revenues are reconciled by a credible, independent administrator applying international auditing standards, and with publication of the administrator’s opinion regarding that reconciliation, including discrepancies, should any be identified. 4 This approach is extended to all companies, including state-owned enterprises. 5 Civil society is actively engaged as a participant in the design, monitoring and evaluation of this process and contributes towards public debate. pD 4.14, 4.16, 4.17 6 A public, financially sustainable work plan for all the above is developed by the host government, with assistance from the international financial institutions where required, including measurable targets, a timetable for implementation, and an assessment of potential capacity constraints. ADVANCINGTHE EITI INTHE MINING SECTOR Conclusion The EITI and the GRI both seek to promote transparency through multi-stakeholder processes. The scope of the GRI is broader and incorporates social and environmental issues as well as financial transparency. The EITI is focused exclusively on the reporting of revenues from extractive industries and is more technical in nature, requiring independent audits of revenue flows between governments and companies to be considered an EITI Compliant Country. Additionally, governments are the main drivers of EITI implementation in a country-led process. Reference to the EITI is made in the draft GRI Mining and Metals Sector Supplement under development, as a consequence of the growing importance of the EITI in the mining and metals sector. Almost all the EITI supporting companies are GRI reporters, but only a quarter of the GRI reporters in the mining and metals sector are official supporters of the EITI. Experienced GRI-reporting companies are used to collecting and publishing information on sustainability topics, and used to communicating with (local as well as regional) stakeholder groups. Transparency on public payments could thus perhaps be considered easier for GRI reporters, and for this reason there is a potential EITI supporter base in the GRI reporting community. Jonas Moberg is the head of the EITI International Secretariat and was a Senior Advisor to the UN Global Compact. Juan Carlos Quiróz is a Policy Analyst in the Revenue Watch Institute in New York. Maaike Fleur is Sector Supplement Manager at the Global Reporting Initiative, in charge of the development of the GRI Mining & Metals sector reporting guidance. Notes 1 The first part of this chapter was written by Jonas Moberg and Juan Carlos Quiroz with editorial support from Francisco paris and Christopher Eads. The authors also acknowledge comments provided by Aidan Davy from the ICMM. Maaike Fleur wrote the GRI’s case study. paul Mitchell provided comments to this case study. 2 For example, Senator lugar and Representative barney Frank from the uS Congress have proposed legislative measures to improve transparency in extractive companies’ reporting. 3 The ICMM is a strong supporter of the EITI, and it has collaborated extensively in this volume. 4 The RWI has also contributed to this volume. See Chapter 18 for extensive guidelines for civil society involvement in the EITI. ADVANCINGTHE EITI INTHE MINING SECTOR buIlDING TRuST THROuGH TRANSpARENCy IN pOST-CONFlICT DEMOCRATIC REpublIC OF CONGO KRISTIAN LEMPA and DELPhINTShIMENA Introduction and background engagement, referred to in this paper as the“catch-all” post-conflict states implementing the EITI are faced with a approach. That approach succeeded in bringing initially peculiar political problem that distinguishes them from other hostile groups to the table to agree and work jointly on the Implementing Countries.1 legacies of distrust and hostility implementation of the Initiative. After this trust-building within society undermine the ability of the post-conflict state to exercise, a certain rationalisation of the structure was needed generate consensus around fundamental policies, particularly in order to ensure the timely and effective Validation of the on resource allocation. In the absence of a robust social fabric, process. post-conflict governments are faced with the temptation of taking the path of least resistance and of avoiding policies that The institutional set-up: the trust-building phase could potentially disturb the fragile power equilibrium. It is The start of the EITI implementation process in the DRC in 2005 therefore likely that only inoffensive policies are adopted, was obstructed by general distrust between stakeholders, which with a low propensity for leading to any meaningful change. had a considerable negative impact on the institutional set-up The EITI implementation process in post-conflict DRC has phase. The high degree of suspicion between and within been marred by this peculiarity. building consensus around the stakeholder groups led decision-makers to set up an immense national EITI programme has proven difficult and initially led to multi-stakeholder structure as well as to define a large sectoral an all-inclusive“catch-all”solution, characterised by a vast scope. The structure needed to be as inclusive as possible to sectoral scope and an inflated implementation structure. avoid excluding actors that might potentially block the process The case of this vast and resource-rich country reveals how and would not trust anybody else to represent their interests. suspicion and distrust in a post-conflict environment can The range of natural resource sectors in the country had to be become serious challenges, but also how solutions can be found taken into account. This“catch-all”approach had two major for the Initiative to succeed despite the post-conflict context. impacts on EITI implementation in the DRC. First, the“catch-all”approach meant that extensive EITI implementation in the DRC stakeholder engagement was required to overcome certain EITI implementation in the DRC has been marked by several obstacles to dialogue and to create some initial momentum. phases that have accommodated the post-conflict realities of The government of the DRC opted for bicameralism for the the country. In the beginning of the implementation process, EITI implementation structure, outlined in a 2007 presidential the focus was put very much on trust-building between and decree, modifying and completing a preceding 2005 presidential within the EITI stakeholder groups – government, companies decree (see Chart 1).Totalling 68 multi-stakeholder representatives and civil society – by means of extensive stakeholder in the two committees, and five permanent staff in the ADVANCINGTHE EITI INTHE MINING SECTOR secretariat, the structure strongly emphasised the concept of allow a continuation of the process. multi-stakeholder representation on the one hand, but was In response to these negative developments, and with the quite heavy in personnel on the other. Accommodating assistance of a World bank consultant, an analysis of the different interests went as far as distributing the posts in the implementation structure was therefore conducted in permanent secretariat with respect to stakeholder affiliation. November 2008 in order to identify obstacles to the Validation Second, the“catch-all”approach resulted in a very wide scope of the DRC before March 2010. The analysis itself was therefore of the Initiative, both in terms of the definition of the extractive carried out in the fashion of a“micro-Validation”,meaning that sector and in terms of the concerned revenue streams. The 2007 the legal structure was tested against EITI criteria, the quality presidential Decree determines that the EITI will have to cover of already accomplished steps was tested, and the general mining, oil and gas, as well as forestry – the documenting of all assessment of the process by stakeholders was explored. The revenue streams from these sectors was envisaged. final report of that analysis revived the stalled dialogue and led The“catch-all”approach contributed to success in establishing to steps aiming at rationalising the structure. In late 2008, the the EITI structure, and secured DRC acceptance as an EITI pursuit of“quick wins”became the leading principle for Candidate Country in February 2008. However, following this necessary changes. initial progress, EITI implementation in the DRC slowed First, the analysis concluded that a simplification of the considerably due to two major factors. structure to only one committee with fewer members was necessary. Second, a restriction of the first report’s scope to the Striving for results: the rationalisation phase industrial mining sector was proposed. Finally, the analysis First, the selection procedure of the National Coordinator ran concluded that a public tender for the staff of the permanent counter to the intention of the“catch-all”approach, and secretariat could ensure quality services and the neutrality of hampered efforts towards building trust from the beginning. the permanent secretariat. Given the mood of mutual suspicion, the National Coordinator Even though the implementation of these recommendations needed to play an integrating role. EITI Criterion No. 3 simply is complicated by a very descriptive EITI legislation, the Minister requires a government to appoint“a senior individual to lead on of planning adhered to the recommendations of the report. The EITI implementation”.The EITI presidential Decree in the DRC, national EITI committee debated the way forward at the end of however, demands that the National Coordinator to be chosen November 2008. An amendment of the legislation in order to by government alone, from the 23 government representatives successfully pass Validation by March 2010 was convened, and a in the technical committee. This regulation is excluding all other priority action plan was adopted. stakeholder groups from that important personnel decision and A realistic approach in terms of structure and scope has been limits the credibility, neutrality and ability to build trust in the fundamental at this stage. The existing bicameral structure of National Coordinator. more than 68 members will be simplified, to consist of only one Second, the“catch-all”approach itself eventually showed its multi-stakeholder steering committee of 19 representatives (see limits. After the successful establishment of the EITI Chart 2). The National Coordinator will not be simply appointed implementation structure, some difficulties became apparent. by government anymore. Instead, an invitation to tender will be The heavy structure proved inadequate for taking the necessary issued to find the right person. The scope of the first EITI report decisions and to prepare for the compilation of the first EITI will be reduced to industrial copper/cobalt extraction in the report. Hence it became more and more obvious that the main mining province of katanga, as well as to oil extraction.2 degree of stakeholder representation had to be weighed against the effectiveness of the structure. The way forward: Validation looming The basic premise of the EITI is to build trust among The year 2009 will be crucial for EITI implementation in the DRC. stakeholders by means of transparency of revenue streams from After the removal of the aforementioned structural obstacles to the extractive sector to government. The DRC case clearly shows implementation, the process needs to concentrate on activities how a lack of technical progress in that respect had a negative that lead to the publication of the first EITI report and impact on the building of trust between groups. In consideration subsequent Validation before March 2010. In this respect of the impending Validation of the process in the DRC, due by Validation has certainly been a“pull-factor”for EITI March 2010, the lack of substantial progress with regard to the implementation in recent times. publication of the first EITI report was becoming more and more The very dense priority action plan spanning the period from worrying to the national EITI committee and to the Minister of January 2009 to March 2010 is focused almost entirely on the planning, who is the president of the national EITI committee indicators for Validation. With the decision on the scope of and‘National Champion’of the EITI process in the DRC. The lack reporting (limitation to industrial mining) now taken, the next of results led to increased mistrust and accusations between the step will be to develop and adopt reporting templates. Once stakeholder groups. Quick progress was needed in order to that has been done, the independent administrator can start his ADVANCINGTHE EITI INTHE MINING SECTOR Chart 1. EITI implementation structure as of Ordonnance Présidentiel N° 07/065 of 3 September 200: the“catch-all”approach involving a maximum number of stakeholders in large and representative institutions Comité de Pilotage (29 members) Composition: Chair: Minister of Planning Government: 11 Ministers + 1 representative of the Presidency and the Prime Minister’s Office respectively Industry: 7 companies + 1 representative of the Mining Business Association Civil Society: 8 representatives Tasks: Decision-making body of the EITI in DRC Comments to Comité de Decision Pilotage on Decision Memos Memos, instructions reports back Conseil Consultatif (39 members) Secrétariat Exécutif Composition: Composition: Chair: Member of Civil Society Head: Secrétaire Exécutif Government: 2 experts of each Minister in the Comité de Four Experts charged with: (i) Audit, (ii) Statistics, Pilotage + 1 representative of the Central Bank, i.e. 23 (iii) Communication and Capacity-building, Industry: 7 companies + 1 representative of the Mining (iv) Administration and Finance Business Association Tasks: Civil Society: 8 representatives Preparation of Decision Memos for Comité de Pilotage Tasks: (e.g. work programme) and subsequent implementation Monitoring of Secrétariat Exécutif of adopted documents Implementation of decisions of Comité de Pilotage Comments to Comité de Pilotage on progress of implementation mission to reconcile figures of the tax administration and by a wide range of stakeholders in order to ensure long-term extracting companies in the copper/cobalt as well as oil sector. commitment. The first EITI report is expected to be published in October 2009. That being said, the case of the DRC also exemplifies the After the publication, the EITI in the DRC intends to start the weaknesses of the“catch-all”approach with regard to producing Validation process. results. The inclusion of a wide range of stakeholders in a lethargic and unproductive process will again lead to frustration Specific lessons learned from EITI implementation in a and mutual accusations. An enabling environment and structure post-conflict context for“quick wins”is therefore important to keep the momentum Phasing the process – from trust-building to publication of implementation. The main lesson learned from EITI implementation in the The trust-building phase should hence be followed by a post-conflict context of the DRC is that it is necessary to find rationalisation phase. A small steering committee, consisting equilibrium between a politically necessary“catch-all”approach of highly motivated stakeholders, is needed to lead the process and a method that will ensure“quick wins”.Trust can be built to the timely publication of the first EITI report. The National in the beginning, allowing for the subsequent simplification Coordinator must play a crucial role here as a neutral broker of of the structure and finally achieving more tangible results. interests. Sequencing of EITI implementation will therefore accommodate This sequenced approach will be best facilitated by legislation the trust-building issues of a post-conflict context most that is not overly prescriptive in terms of structure, but rather appropriately. defines an enabling implementation environment. Decisions on As a general observation, trust between stakeholders has scope and structure will need to be left to the multi-stakeholder generally been low during the first phase of EITI implementation. group rather than to the legislator, for instance by leaving all A very inclusive approach will be necessary to avoid excluding operational and scope decisions to internal regulations to be actors that will not trust anybody to represent their interests adopted by the steering committee. and might potentially obstruct the implementation process. If the legal framework defines the EITI programme too The basic decisions like the work plan will need to be taken narrowly, phasing the process will prove difficult. legislation ADVANCINGTHE EITI INTHE MINING SECTOR needs to leave some margin for the application of lessons gradually focusing EITI implementation in post-conflict learned and the continuous improvement of the national EITI countries. The transition from the trust-building phase to the programme and structure without having to re-legislate. rationalisation phase will be politically very difficult to sustain for the national EITI“Champion”; timing will be crucial. Donor support – come in early and come back later The transition should be made at the break-even point In the DRC, donor support has been based on two parallel where sufficient trust has been built up and the need for strategies: permanent and short-term. On the one hand, a results is pressing. An external consultant who will conduct a permanent adviser to the EITI“Champion”,the Minister of “Validation”of the national EITI process will be best placed to planning, was sent in order to act as a neutral broker of interests identify the break-even point where the transition from the first until the National Coordinator was able to play that role himself. to the second phase should be made. This approach demands a long-term commitment from donors, particularly in the beginning of EITI implementation when Kristian Lempa is currently mining sector governance expert at GTz capacity constraints and the lack of trust are most severe. headquarters in Germany. he formerly worked on EITI programmes in Early decisions, particularly on legislation and the work plan, DRC, Central Africa Republic and Ghana. Delphin Tshimena is a World require experience and trust, and a neutral honest broker Bank mining consultant at the CoCPo Division based in Kinshasa. is very valuable in this regard. Another lesson that can be drawn from EITI experiences in the DRC is the need for donor support in the process of Chart 2. EITI implementation structure as proposed to the Comité de Pilotage on 2 November 200: the“quick-wins”approach with a lean and effective structure Comité d’Exécution (19 members) Composition: President : Prime Minister Government: President’s Office, 5 Ministers (Plan, Mines, Oil, Environment, Finance) Industry: 6 representatives Civil Society: 6 representatives Role: Decision-making body of the EITI in the DRC Installs on the basis of adopted Reports activities back Technical (ad hoc) sub-commissions Secrétariat Technique (up to 6 members) Composition: CONTROLS Composition: 1 National Coordinator (chosen by public tender with Chosen by the CdE on the basis of their expertise terms of reference based on activities accorded to him with regard to the specific mission of the group ASSISTS by the action plan) Role: Role: Implementation of specific tasks of the action plan Assisting the operations of the technical sub-commissions Implementation of decisions of CdE Notes 1 The present essay will only deal with challenges posed to EITI 2 Oil was chosen because it represents a low effort / high reward activity, implementation by a post-conflict context. More general challenges as there are currently only two oil companies extracting in the DRC and such as low administrative capacity will not be discussed here, even together they contribute an estimated uS$150m to the national budget. though they might be more severe in adding to difficulties faced by the Implementing Country. ADVANCINGTHE EITI INTHE MINING SECTOR REVIEWING HAlF A DECADE OF EITI IMplEMENTATION IN GHANA’S MINING SECTOR DAVID NGUYEN-ThANh and MAYA SChNELL1 Introduction background There are several reasons why Ghana constitutes an important Ghana has always been well known for its mineral abundance, case to be considered in any account of the EITI and mining. with the first discovery of gold dating back more than five For one, Ghana was one of the first countries to adopt the centuries. Today, the extractive sector continues to play an voluntary initiative in 2003 and, in fact, constitutes the first important role for the growth and development of the country, Candidate Country to deal with the mining sector only. with mining accounting for about 35% of total foreign exchange Second, Ghana extended its EITI reporting requirements earnings and 5.5% of Ghana’s GDp.Government revenue from to the sub-national level at an early stage and thus offers the mining sector accounts for about 2.5% of GDp.Gold remains important insights in terms of good practices of extending EITI the most important mineral and the country’s largest export to sub-national revenue flows. Against this background, this earner after cocoa and timber. Other natural resources include paper analyses the achievements and challenges of EITI manganese, diamond and bauxite. implementation in Ghana. As of 2008, our findings are twofold: Since the 1980s, the Ghanaian government has progressively on the one hand, substantial achievements have been made in privatised the mining industry and now plays a mainly increasing transparency of the country’s mineral revenue flows, regulatory role. The Minerals and Mining Act of 2006 increased and most EITI criteria have been fulfilled. On the other hand, fiscal incentives for foreign investments and has kept the however, there remain important challenges that need to be minimum royalty rate at 3%. At present, the industry is addressed. The most important of these are the improvement of dominated by 13 large-scale mining companies from South the sub-national implementation of the scheme, the timely Africa, Australia, Canada and the united States, with the largest publication of EITI audit reports – a central feature of any of them being the gold producers Gold Fields, Newmont, well-functioning EITI process – and the extension of the AngloGold Ashanti and Golden Star Resources.3 In addition, over initiative’s scope to the Minerals Development Fund (MDF), 300 small-scale mining companies operate in the country. which is currently not being covered by the EITI in Ghana. In Ghana, efforts to increase transparency in the revenue This paper is based on interviews with government, industry flows of the country’s extractive sector did not commence with and civil society representatives, whose support in writing this the government’s commitment to participate in the EITI. prior to paper has been immense.2 2003, members of the Chamber of Mines voluntarily disclosed information about their royalty, tax and ground rent payments to the Chamber, which then published the information in national and local newspapers; information on payments was 0 ADVANCINGTHE EITI INTHE MINING SECTOR also reported to the Minerals Commission. This information, established and has made considerable progress towards however, referred only to the payments made by companies fulfilling the six EITI criteria. Since 2003, three audit reports have and did not include the independent audit or reconciliation of been published, which have created a much higher degree of payments undertaken under current EITI practices. Hence, while transparency in the revenue flows of the country’s extractive transparency in the extractive sector in Ghana did not start from sector. As postulated by the EITI criteria, the reports provide an scratch with the EITI, the Initiative has led to a much higher independent and credible audit of the following transfers: (i) degree of transparency in mineral revenue flows than previous payments made by companies, (ii) revenues received by the efforts have afforded. government, and (iii) disbursements made by the government to local communities affected by mining activities.5 like Nigeria, Reviewing EITI implementation in Ghana: Ghana has also chosen to disaggregate the published payments achievements and challenges by company and revenue type. Ghana announced its intention to adopt the EITI in 2003 and Second, as demanded by the Initiative’s criteria, the reports thus constitutes an early participant from whom extensive also include the reconciliation of these transfers and indicate lessons can be drawn. While significant improvements have possible discrepancies. Here, the results are as follows: while the been made in increasing the transparency of the country’s reports find that in general payments and revenues have been mining revenue flows through participation in the programme, well accounted for, they also indicate deviations in payments the initiative’s implementation also leaves room for and receipts of corporate taxes, dividends and ground rents in improvements, and points to several important challenges 2004 and 2005. Moreover, the reports find several shortcomings that need to be addressed. in the disbursements of mining benefits to local communities Ghana’s 2003 commitment to participate in the Extractive (a point that will be elaborated later). In addition to distributing Industry Transparency Initiative was spearheaded by the the audit reports at workshops and other events, an EITI website ministries of Finance and Mines. under their auspices, two was launched in 2007 to make the audit reports, the work plan central bodies were created to promote the implementation of and related documents available to the general public.6 the scheme, the first being the National Steering Committee Third, the EITI process in Ghana also fulfills the requirements (NSC), the governing board of the EITI in Ghana. Chaired by the of active civil society involvement and complete industry Ministry of Finance, the NSC reflects the multi-stakeholder participation – both of which constitute clear strengths of the character of the initiative by bringing together various implementation strategy developed by the NSC.7 government, industry and civil society representatives.4 Despite these achievements, however, the implementation of The second body is the GHEITI Secretariat, which holds the EITI in Ghana also leaves room for improvements, and points responsibility for implementing, monitoring and evaluating the to three major challenges that need to be addressed. The first of national programme and, as such, enforces the decisions made these challenges is to ensure that the initiative’s implementation by the NSC. While the Secretariat was first set up within the is moved forward in a quick and timely manner. In the past, this Ministry of Mines, it was later relocated to the Ministry of has not always been the case. While the government decided to Finance to ensure better and faster availability of funding. join the EITI as early as 2003, it was not until 2006 that the This relocation facilitated the day-to-day operation of the independent aggregator was chosen, and not until 2007 that Secretariat, but has subsequently also led to concerns from civil the first audit report was actually published by the aggregator. society and other domestic stakeholders who demand more More importantly, this delay, which is often attributed to autonomy and criticise the Secretariat’s embeddedness within inadequate funding, has contributed to the three-year time-lag the Ministry, as EITI issues may not be completely insulated from that continues to exist in documenting mining revenue flows government politics. After the formal EITI structure was set up, (e.g. the 2008 audit report covers data for 2005). Arguably, this an independent aggregator was chosen to conduct the audit lag reduces the ability of parliament and civil society and disclosure of revenues and payments, to check the stakeholders to enhance government accountability and adherence to international accounting standards, and to improve development outcomes from benefits paid by the formulate recommendations to improve the EITI process. extractive industry, and hence needs to be urgently addressed. Today, nearly half a decade after the government announced The second challenge for the EITI in Ghana is its application to its commitment to the EITI, Ghana’s achievements in the sub-national level, which has been voluntarily adopted by implementing the scheme have been substantial. In addition to the government. Recently, much of the public debate over increasing the transparency of mining revenue flows, the mining has focused on the industry’s impact on local initiative has managed to bring together major stakeholders communities. To compensate districts for the impacts of the and has raised the country’s credibility in furthering its good more negative aspects of mining activity, Ghanaian law governance agenda. With regard to EITI guidelines, the stipulates that 9% of mining royalties are to be allocated to implementation process in Ghana has also been well the communities from which the minerals are extracted.8 ADVANCINGTHE EITI INTHE MINING SECTOR 1 The disbursement procedure consists of two stages. In the These shortcomings of the sub-national implementation first stage, the Internal Revenue Service (IRS) transfers the suggest that more needs to be done to improve the EITI in appropriate share of revenues to the Head Office of the Ghana. payments going to stools and traditional authorities Administrator of Stool lands (OASl), which then forwards the should be captured by the audit reports, and all recipient district funds to its regional offices. In the second stage, the regional assemblies should be covered, to provide full transparency of OASl offices distribute the money to the actual beneficiaries the revenue flows to local communities. in the mining communities: district assemblies, traditional A third challenge for the EITI in Ghana is to extend the scope authorities, and stools. To extend EITI reporting requirements of the initiative to the Minerals Development Fund (MDF), to to the sub-national level and to improve the transparency of which 10% of all mineral royalties are allocated. While the disbursement flows, specific reporting templates were designed purpose of the MDF is to assist the development of the for the district assemblies.9 These, apart from capturing all Ghanaian mining sector, neither the revenues that flow into it, receipts, also record the utilisation of funds on the local level. nor the use of funds, is currently being covered by the EITI. In practice, however, extending the EITI to both stages of the Given the large share of royalties that go into the Fund, this disbursement process is hampered by several obstacles. First, weakness should be urgently addressed to increase the overall the audit report for the year 2004 indicates that there existed transparency of mining revenue flows in Ghana.11 shortages in the payments made from the IRS to the Head Office of the OASl. Although these shortages were not significant The future of the EITI in Ghana compared to the overall amount, they imply that mining There are a number of future challenges that constitute communities were being deprived of development funds by important opportunities for improving and reinvigorating the the government. Moreover, the reports show that some of the EITI in Ghana. The previous section has identified three major disbursements were significantly delayed or split into two challenges relating to the current state of the scheme: first, transfers. ensuring the quick and timely implementation of the Initiative, More importantly, however, there seem to be particular with specific emphasis on addressing the three-year time-lag problems in increasing transparency in the second stage of the that continues to exist in documenting revenue flows; second, disbursement process – that is, the payments going from the improving the sub-national implementation of the EITI; and regional OASl offices to district assemblies, stools and third, to extend the EITI to the royalties flowing into the Minerals traditional authorities. For one, not all the local beneficiaries are Development Fund (MDF). captured by the EITI reporting process. The reporting templates, In addition to these three, another big challenge will be to which capture the receipt and utilisation of disbursements, are incorporate the oil and gas industry into the EITI scheme as only completed by district assemblies and not by the stools or there have been recent discoveries of significant amounts of traditional authorities, which receive 45% of the revenues offshore oil and gas. This necessitates the extension of EITI earmarked for local communities. Hence, the audit reports can reporting coverage and stakeholder representation. Here, a only refer to transfers that go to district assemblies and do not fundamental decision needs to be made and institutional contain any information on how much the other stakeholders arrangements need to be prepared. Interviewees suggested receive at what point in time. that a good start could be to invite the two main International Secondly, while transparency in disbursement flows is limited Oil Companies (IOCs) in Ghana – Tullow Oil and kosmos Energy to the payments made to district assemblies, only a few – to sit on the NSC, and possibly to extend this membership to assemblies are in fact captured by the audit reports, with many the Ghana National petroleum Corporation (GNpC). If more oil left out. The most recent audit report, for instance, for the year companies come to Ghana and are willing to join GHEITI, it may 2005, only lists disbursements made to two district assemblies, also become necessary to establish an industry association or while at the time there existed eight major mining sites in the chamber that can represent all oil companies accordingly. country.10 According to the independent aggregator, the Similarly, the 2008 decision to extend the scope of the EITI to underlying reason for this limited scope is that most district the forestry sector has yet to be implemented, which again assemblies do not possess bank accounts or budgets and hence requires a discussion on the scope of reporting and do not have the necessary information to fill out the reporting representation of stakeholders in the NSC. It should be noted templates. Clearly, this significantly limits the scope of the EITI in that this extension of the EITI will pose formidable challenges Ghana and should be addressed so that all district assemblies can for the capacity of existing EITI structures, as it entails the be covered by the audit reports. In addition, where bank accounts inclusion of numerous smaller companies that operate in the and budgets existed, the reconciliation of disbursements was forestry sector. rather difficult, as the regional OASl offices did not provide In addition to these major challenges, domestic stakeholders accurate information on the sources of the revenues, nor the have also cited the need to improve communication (especially formulae with which the disbursed amounts were calculated. within the NSC) and to further implement the recommendations 2 ADVANCINGTHE EITI INTHE MINING SECTOR made by the independent aggregator. And last, there have also communication within the NSC, so that the different expectations been voices demanding a more formal discussion on whether or and working mentalities of civil society, government and industry not Ghana should follow Nigeria’s path of providing a legal are taken into account. backing to the EITI. last but not least, an important lesson is that the EITI process should remain manageable, in terms of both decision-making lessons learned and implementing capacities. The EITI experience in Ghana has Since Ghana first joined the EITI, it has been cited as a good demonstrated that the focus should not be on building performer in implementing the scheme. Not only was Ghana extensive governance structures but on finding the simplest the first Candidate Country to deal with mining only, it also way to move the Initiative’s implementation forward in a quick extended EITI reporting requirements to the sub-national level and timely manner. Hence, while discussing the size of the at an early stage in the process. The extensive experience with steering committee may be useful to ensure the proper the EITI in Ghana provides a number of lessons for other operation of the body, it should not be granted too much countries yet to sign on to the EITI scheme. attention in light of the numerous challenges that constitute The first of these lessons is that the sub-national important opportunities to further improve the EITI in Ghana. implementation of the EITI should be dealt with early on in the process. Despite the current problems with improving the Dr David Nguyen-Thanh is the Tax and Governance Adviser in the Good transparency of revenue flows to local communities, Ghana has Financial Governance Programme of the GTz in Accra, Ghana. Maya planned and communicated sub-national implementation right Schnell is an EITI consultant who has been working for GTz Ghana. from the beginning, which proved to be a great advantage. Once the formal EITI structure was set up, four types of reporting templates were designed, with one aimed specifically at capturing revenue flows at the district level. part of the weakness of the current sub-national implementation seems to be that the reporting templates are only considered by district assemblies and not by the stools and traditional authorities, who also receive significant disbursements from the government. The second lesson to be drawn is that the EITI process should be moved forward in a quick and timely manner. In Ghana, progress has been slow, particularly in the early years of EITI implementation. While the government decided to join the EITI in 2003, the first audit report was not published until 2007 and the aggregator not chosen before 2006. This initial delay has not only slowed down the overall implementation process but has also contributed to a three-year time-lag in documenting revenue flows, which clearly limits the Initiative’s potential for increased accountability. Third, as stakeholder engagement is a key indicator for ensuring the successful implementation of the EITI, another lesson is to make sure stakeholders are committed to the Initiative. In Ghana, government commitment was reflected in public statements as well as in the use of country resources to fund the implementation of the EITI. In addition to the government, commitment has also been strong from civil society and the extractive sector. Civil society has been raising public awareness and driving the discussion through its voice, knowledge and capacity. CSO representatives must make sure to be a legitimate voice by reaching out to a broader set of CSOs and seeking their opinions. Represented by the Chamber of Mines, the major mining companies in Ghana have also been supportive from the very beginning. Generally, in order to ensure commitment, much attention should be paid to effective ADVANCINGTHE EITI INTHE MINING SECTOR 3 References 6 www.geiti.gov.gh Ghana Chamber of Mines (2008), ”Factoid 2008”,Accra, Ghana. 7 Companies participating in the audits for the years 2004 and 2005 Ministry of Finance and Economic planning (2006),“Inception Report on provided 99% of all mining revenues to the government of Ghana – a the Aggregation on payments and Receipts of Mining benefits in contribution that we believe fulfills the criteria of complete industry Ghana”,Accra, Ghana. participation. Ministry of Finance and Economic planning (2007),“Report on the 8 In Ghana, mineral royalties are distributed as follows: 80% go to the Aggregation/Reconciliation of Mining benefits in Ghana, January 2004 Consolidated Fund (the term that describes the general State account), – June 2004”,First Aggregator Report, Accra, Ghana. 10% are dedicated to the Minerals Development Fund, which will assist the development of the mining sector in Ghana, 1% goes to the Ministry of Finance and Economic planning (2007),“Report on the Administrator of Stool lands for administrative purposes, and the Aggregation/Reconciliation of Mining benefits in Ghana, July 2004 – remaining 9% of royalties are allocated to the local districts that provide December 2004”,Second Aggregator Report, Accra, Ghana. the minerals. Ministry of Finance and Economic planning (2008),“Report on the 9 The practice of extending the EITI to the sub-national level reflects the Aggregation/Reconciliation of Mining benefits in Ghana, January 2005 Ghanaian understanding that local districts act as independent “agents – December 2005”,Third Aggregator Report, Accra, Ghana. of development” whose revenue receipt and utilisation should be National Democratic Institute for International Affairs (2007), transparent. “Transparency and Accountability in Africa’s Extractive Industries: The 10 The two districts covered by the report are the Obuasi Municipal Role of the legislature”,Washington, DC, pp. 68-73. Assembly and the Wassa West District Assembly. World bank (2007),“Country Experience with EITI – part 2”,petroleum 11 A more general question – although not directly related to the Sector briefing Note, No. 6. mandate of the EITI – is what broader effect the EITI has for improving EITI Website: www.eitransparency.org good governance and accountability in the country. That is, how does improved transparency affect the utilisation of revenues? In Ghana, the Ghana EITI Website: www.geiti.gov.gh implementation of the EITI draws a mixed picture. On the one hand, Ghana Chamber of Mines Website: www.ghanachamberofmines.org civil society is actively involved in reporting on EITI issues, which has significantly increased accountability. On the other hand, however, legislators – who could use the released data for influencing revenue spending and to press for improved government accountability – are Notes not involved much in the EITI process. While most Mps lack basic 1 This article has been produced by David Nguyen-Thanh and Maya information on the country’s participation in the Initiative, the Schnell in the context of German Technical Cooperation (GTZ) Support legislature is also not represented in the National Steering Committee to the EITI implementation in Ghana; GTZ is commissioned by the (NSC) that governs the Initiative’s implementation. German Federal Ministry of Economic Cooperation and Development (bMZ). However, the views expressed therein do not necessarily reflect those of GTZ or bMZ. Any comments can be sent to the corresponding author: [email protected] 2 Specifically, we would like to thank Chris Anderson from Newmont Ghana, Sulemanu koney from the Ghana Chamber of Mines, Franklin Ashiadey from the Ministry of Finance and Economic planning (MoFEp), kwaku boas-Amponsem from bOAS & Associates, Amponsah Tawiah from the Minerals Commission, Steve Manteaw from ISODEC, Dr. Gad Akwensivie from the Office of the Administrator of Stool lands (OASl), Stefan bauchowitz and Ruby bentsi from DFID Ghana for their insights and helpful comments on earlier draft versions of this paper. All errors remain ours. 3 While private companies operate in the gold, bauxite and manganese sector, the diamond industry is dominated by a State-owned enterprise. 4 As of 2008, government agencies represented in the NSC include the Ministry of Finance and Economic planning, the Ministry of Mines, Forestry and lands, the Minerals Commission, the Internal Revenue Service (IRS) and the Office of the Administrator of Stool lands (OASl). The industry is represented by the Chamber of Mines, while ISODEC (an umbrella organisation for about twenty regional CSOs) acts on behalf of civil society. 5 The first audit report was published in 2007 and covers January to June 2004, with July to December 2004 being covered by a second report published later in the same year. by April 2008, the third audit report was released, analysing data for January to December 2005. ADVANCINGTHE EITI INTHE MINING SECTOR TRANSpARENT buSINESS pRACTICES: ARCELoRMITTAL’S PARTICIPATIoN IN LIBERIA’S EITI (LEITI) STEVE JohN and MARCUS WLEh 1 Summary wars between 1989 and 2003, the country’s economy and This case study shows how a large metals and mining company infrastructure had been destroyed. Instead of contributing to is addressing the risks of operating in a traditionally liberia’s development, past revenues from the extractive sector less-transparent, low-capacity and post-conflict country. liberia merely fuelled the conflict. post-war, nearly 85% of its citizens is a country where multinational corporations could be viewed are unemployed and 75% have to try to survive on less than suspiciously as having just one motive: taking away natural uS$1 per day. resources while providing little or no benefits to its citizens. ArcelorMittal is the world’s leading steel company, with over For liberia, a country ravaged by 14 years of civil war, 320,000 employees in more than 60 countries, and an industrial attracting responsible foreign investment is vital for urgent presence in 28 countries spanning four continents. It is the reconstruction requirements and long-term development. leader in all major global steel markets, including automotive, However, the ardent desire for foreign investment is not construction, and household appliances, with leading research considered without caution. The recent history of liberia shows and development (R&D) and technology, as well as sizeable that far from benefiting liberians, the activities of many foreign captive supplies of raw materials and a large distribution companies have worsened already poor living conditions and network. ultimately contributed to the recent war that further ravaged In December 2006, the government of liberia and the nation. It was against this backdrop that ArcelorMittal ArcelorMittal announced the successful conclusion of the review entered the liberian extractive sector. of a mining development agreement (MDA) signed in 2005. Hence, for ArcelorMittal, the first major foreign investor in The landmark agreement will bring the country investment of country since the war, its iron ore mining project represents over uS$1.5 billion. The liberian project is hugely important to more than an important part of its business strategy. It is an ArcelorMittal, playing a significant part in the Group’s upstream opportunity to showcase how responsible and transparent mining growth strategy. ArcelorMittal has targeted this project business practises can benefit both the company and the host to produce over 15 million tonnes of iron ore a year. The overall country, bringing about mutual understanding and trust, which construction phase is expected to take four years to get to full in turn can increase stability in the investment climate. capacity, but a programme is in place to begin iron ore shipments during 2011. background The project consists of reopening mines in Nimba County, The Republic of liberia, a country on the west coast of Africa, is rehabilitating an abandoned 300-kilometre railway and home to around 3.5 million people. Rich in iron ore, gold, developing the buchanan port for shipping traffic. In addition, diamonds and forestry resources, but devastated by two civil the entire infrastructure at the townships at yekepa and ADVANCINGTHE EITI INTHE MINING SECTOR buchanan require reconstruction, including the provision of Highlights of the Mineral Development Agreement (MDA) electricity, water, sanitation and other support functions. ArcelorMittal shall: ArcelorMittal liberia will employ 3,500 persons directly, and • provide the government with financial reports on the quantity of iron create an estimated 20,000 new jobs in the country including ore produced and sold every calendar quarter, and a report on all operations and activities at the end of each financial year; those with contractors and suppliers. In addition there will be • construct, maintain and operate health facilities in the Concession Area considerable investment in health care and education. with modern equipment and procedures with accepted international ArcelorMittal entered liberia against a background of high standards; expectations about attracting foreign investment to boost the • provide training for liberian citizens for skilled technical, administrative and managerial positions; country’s drive towards recovery and development. In August • provide an annual social contribution of uS$3 million to be managed 2005, when the first MDA was negotiated, the country was on and disbursed for the benefit of communities in the counties of Nimba, the path to restoring democracy through general presidential bong and Grand bassa by a dedicated committee formed by the company and the government; and and parliamentary elections. However, most of the vital • conduct its operations in accordance with the environmental socioeconomic indicators were poor and the gross domestic protection and management law of the Republic and undertake an product was a fraction of the current 2007 estimate of uS$1.525 annual environmental audit and assessment. billion. Furthermore, the country’s road and other basic infrastructure was in decline and a 15,000-strong uN engagement programmes in the country. Through proactive peacekeeping force kept a fragile peace. engagement, using international best practices, the company is liberia is blessed with abundant mineral, fishery and forest engaging with local communities that are directly or indirectly resources that have helped fuel the civil conflict. As the country affected by our operations. slowly transitions from war to stability and development, the Clearly ArcelorMittal liberia has recognised that developing government of liberia and its international partners are keen to excellent relations and dialogue with the government of liberia ensure that the use of these natural resources provides direct is crucial to the success of the project. Over the past two years a and tangible benefits to the 3.5 million residents of liberia. relationship has been built based on the shared mutual goal of Initiatives and programmes such as the liberia Extractive economic development powered by a thriving private sector. Industries Transparency Initiative are key tools in this regard. Through this collaboration, the government of liberia has ArcelorMittal’s role and ambition in liberia established a national coordinating body (Dedicated Funds The ArcelorMittal uS$1.5 billion iron ore project in liberia Committee) to oversee the management of the annual uS$3 could not have come at a better time for a country striving to million county social development fund. At the county level, attract foreign investment to help jumpstart an economy the government established Development Management devastated by fourteen years of civil conflict. Since the start of Committees in Nimba, bong and Grand bassa counties to operations in 2006, ArcelorMittal liberia has provided nearly supervise the implementation of projects and programmes 500 jobs directly, and, through contractors, provided funded by the development fund. employment for 2,100 liberians. There has been significant ArcelorMittal’s philosophy and values recognises that its progress in rebuilding the mining and social infrastructure in position in the steel industry brings unique responsibilities, with the areas of operations. After the rehabilitation of the railroad a goal to provide the leadership that will transform tomorrow's shipment of the first consignment of iron ore is expected to start steel industry. The company has a clear vision of the future, afterwards in 2011 underpinned by a consistent set of values: sustainability, quality Throughout ArcelorMittal’s investment in liberia, there has and leadership. For the liberia project, leadership constitutes been an aim to demonstrate leadership in contributing to the responsible mining policies, community support, and socioeconomic development of the country. The MDA obliges transparency and openness. ArcelorMittal to provide more than uS$75 million to support socioeconomic development in liberia during the lifetime of the Extractives Industries Transparency Initiative in liberia investment. This is unprecedented in the industrial history of (lEITI) and ArcelorMittal liberia liberia, and it will lead to significant improvements in the The government of liberia is committed to developing an communities where the company is operating. extractives industries sector that is grounded in transparency ArcelorMittal liberia has also reopened two hospitals in and accountability in both the allocation and utilisation of its yekepa and buchanan to provide medical care to its employees natural resources. Only by doing this can the country be sure of and local residents. With a staff of highly qualified teachers and maximising the development impact of the sector, and ensuring administrators, the schools in yekepa provide free education to that mineral revenues are not used for destructive purposes – the children of ArcelorMittal liberia employees and subsidised which they have been in the past. The mineral wealth of liberia education to the residents of surrounding communities. must be used for the development of all, not for the personal The company also has one of the most dynamic community benefit of a few. With this philosophy in mind the government ADVANCINGTHE EITI INTHE MINING SECTOR of liberia has committed to implementing the EITI, viewing it as EITI has been seen as symptomatic of the wider approach to an important foundation for achieving transparency and corporate responsibility within the company in liberia and accountability in the sector. across all global operations since the ArcelorMittal Group was Consistent with the international EITI criteria, the main formed in 2006. As such, a Community Engagement Standard is objectives of the lEITI programme are to: now in place which defines minimum community engagement 1 ensure that the awarding of resource rights is undertaken requirements that all major subsidiaries – including transparently, and in the interests of the liberian people; ArcelorMittal liberia – shall meet. The standard is reinforced 2 regularly publish all payments made to all levels of the through a Community Engagement manual, currently being government from resource companies, and detail all rolled out across the Group. The guidance explains the why and revenues received; how of engagement, as well as sharing good experiences and 3 ensure that the payment and revenue information disclosed ideas gleaned from work already done in this area in other is the subject of a credible, independent audit, applying locations. international audit standards. Other processes are in place in liberia. For example, the The cornerstone of the lEITI is a commitment to developing the management of ArcelorMittal liberia encourages employees to approach in close collaboration with partners from civil society report fraud, corruption, theft, and other misconduct and and the private sector. Hence, to oversee the development of violations of laws and regulations via the company’s Fraud the Initiative, a multi-stakeholder working group has been hotline, to enable an ethical working environment. established. The working group is chaired by the Minister of Finance of liberia and the Minister of lands, Mines and Energy. Next steps and expectations In addition to ArcelorMittal liberia, other members of the group Following the necessary preparatory works, including include the liberia Timbers Association, the Miners and brokers stakeholder engagement and community outreach, the lEITI is Association, and a number of civil society organisations due to publish its first EITI Report in early February 2009. An including the publish What you pay liberia Coalition, the external organisation administrator has been appointed as the National Council of Chiefs and Traditional leaders, and the lEITI Administrator, and has begun work on the inaugural liberia National bar Association. report. ArcelorMittal liberia’s philosophy mirrors that of the lEITI and ArcelorMittal has received the necessary templates along with is consistent with the ArcelorMittal Group’s commitment to instructions for reporting all payments made to all agencies and transparent governance practices. For the company the lEITI is officials of the government of liberia during the period 1 July seen as a key forum for ensuring accountability and 2007 up to and including 30 June 2008. ArcelorMittal is transparency in the utilisation of revenues and other proceeds committed to completing and submitting its payment reports generated from liberia’s natural resources. As a responsible by the designated deadline of 7 January 2009, and thereafter to investor, ArcelorMittal is committed to cooperate in whatever remain engaged with the lEITI and the Administrator during the manner possible to ensure that the lEITI achieves its objectives. reconciliation process. In line with these commitments, the company has participated Achieving the lEITI’s objective of good resource governance in the launch, meetings, seminars and other public forums requires more than just the disclosure and publication of organised by the lEITI. payment and revenue data: it entails the wide dissemination The company provides information where required by the and discussion of the reports. key to the success of the Initiative lEITI. Most recently, in October 2008, company representatives is therefore a deliberative process of discussion, disclosure and attended lEITI stakeholder meetings in the capital, Monrovia, evaluation of payment and revenue data. and community consultation meetings in Grand bassa County. Moving forward, ArcelorMittal plans to enhance its The meeting was intended to introduce community leaders and participation in and contribution to the implementation of the local authorities to the objectives, mandate and programmes of lEITI. The enhanced contribution and participation will include: the lEITI. The outreach efforts also targeted elders, chiefs, youth • sustained engagement with other stakeholders, both in and women’s groups, and other mining and logging companies. terms of effective and regular participation in the lEITI One outcome and recommendation from the stakeholder steering group and interaction with other companies in the exercise, endorsed by ArcelorMittal liberia, is to hold regular mining sector; “town hall”meetings to further improve dialogue. Relevant • initiating discussions with other companies on the individuals from the company including Community liaison formation of a corporate responsibility forum that will share Officers (ClOs) will be key to improving this process. best practices on corporate responsibility and engagement To ArcelorMittal liberia the principles of the EITI reflect more with many stakeholders. The main topics will include than just revenue transparency; it is about effective stakeholder promoting the benefits of transparency and meaningful dialogue and responsible business practices. For this reason the community engagement; ADVANCINGTHE EITI INTHE MINING SECTOR • in keeping with its business principles and code of conduct, the company will ensure that all transactions with national authorities and community leaders are transparent and consistent with the intent and spirit of the lEITI; • supporting lEITI implementation, including, if requested, contributing to the budget of the lEITI or any of its core activities. Arcelor and Mittal Steel merged in 2006 to become the world’s largest steel company. In 2007, the newly merged ArcelorMittal launched its new brand, “transforming tomorrow”, developed to promote consistently high standards across the business. As one of the world’s largest companies its position in the industry brings unique responsibilities. Nowhere is this more relevant than in liberia. by leading by example, ArcelorMittal can promote responsible and transparent operations in a post-conflict country, enhancing good resource governance which will ultimately benefit the company, the host government, and the communities and citizens of liberia. Steve John, Socially Responsible Investment Manager for ArcelorMittal. Marcus S. Wleh is Corporate Responsibility Manager for ArcelorMittal Liberia. Notes 1 This article has been produced by ArcelorMittal. The lead authors are Steve John (ArcelorMittal) and Marcus Wleh (ArcelorMittal liberia). The authors are extremely grateful to T. Negbalee Warner, Head of Secretariat for the lEITI, for his advice, comments and contributions. Any comments on this article can be directed to [email protected] and [email protected] . ADVANCINGTHE EITI INTHE MINING SECTOR 10 lEARNING-by-DOING: CIVIL SoCIETY ENGAGEMENT IN MINING IN MoNGoLIA DoRJDARI NAMKhAIJANTSAN Introduction mining has become the centrepiece of the economy, forcing the This case study focuses on the role civil society in Mongolia government, business community and ordinary people to adjust has played in influencing mining policies and adopting and their preferences and lifestyles in line with the realities of a advancing the Extractive Industries Transparency Initiative. resource-rich state. While the EITI is only one of several initiatives to promote One such reality has been a growing divide in society on the transparency and build dialogue in the mining sector, its role of mining in the economy and society as a whole, in light of multi-stakeholder approach and focus on concrete deliverables the visible damage mining is causing to environment, settlement make it distinct from other initiatives and gives civil society a patterns and perceived government behaviour. Most of the very clear and substantive role to influence mining sector criticisms surrounding the government's handling of the sector development. but challenges remain to make civil society and mining companies' actions come from opposition political participation more effective, including building its capacity, parties, civil society organisations, local citizens affected by ensuring more formal participation, providing financial support mining, and ordinary citizens worried about the negative effects and requiring accountability and independence. of mining. background The emergence of civil society in Mongolia Mongolia is a vast landlocked country in Central Asia, bordering Transition to a democratic state was partly characterised by the with Russia on the north and China on the south. It has made a emergence of a dynamic civil society in Mongolia in 1990s. rapid transition from a Soviet satellite, centrally planned Traditionally government-supported, communist-oriented, economy to a growing democracy and a market-driven economy non-governmental organisations ceded the stage to a large over the past 18 years. GDp per capita has almost tripled from number of interest groups with both professional and social 2002-2007, reaching about uS$1,500 in 2007.1 Many challenges agendas. However, the initial emergence of civil society groups remain, however, in strengthening the newly established went through a filtration process when financing, organisational democratic and market institutions. Despite a healthy 9% and political limitations forced many organisations to stop their average growth of the economy over the past four years, 32% of activities. Overall, a core of strong civil society groups passed the Mongolia’s population of 2.7 million people officially remain test of time and now play an active role in social life and political mired in poverty. The country is ranked 114th in the world (as of processes in the country. The government has throughout civil 2005) by the uNDp human development index. Traditionally, the society’s evolution also learned more about how to deal with the country’s economy has been based on agriculture dominated by civil society sector, and employs a cooperative rather than pasture-based animal husbandry. However, in recent years confrontational approach, with mixed success. ADVANCINGTHE EITI INTHE MINING SECTOR One of the indications of the growth of civil society activity 2002 to about 30% in 2007, while the traditionally largest sector over the past two decades is the increased number of registered of the economy, agriculture, remained stable at about 20% of non-governmental organisations (NGOs), which grew from GDp. 1,075 in 1998 to over 6,000 in 2007; the number of people As mining became the dominant industry and commodity employed in the sector also grew steadily, from only about prices began to rise, issues relating to economic benefits and 2,000 people to about 15,000, as shown in Figure 1. Although inequality began to be raised by the public. It became evident many of these registered organisations are inactive, or operate that poverty, including in mining regions, was not subsiding. non-permanently, this growth is in itself quite significant. Of Citizens and policymakers began to ask whether Mongolia was these organisations, less than 200 are thought to be permanently getting its fair share from mining operations, either through active and represent“true”civil society, as opposed to groups taxation, royalties, or government dividends in mining representing industry, political, and governmental interests. enterprises. There was particular interest in one major Over 70% of the registered NGOs operate in the capital city, gold-mining contract related to a Canadian mining company, ulaanbaatar. NGOs are active in the areas of gender and family, boroo Gold, according to which Mongolia received only a small child and youth development, education and science, culture, share of the total proceeds from the mine. The Mongolian public health, human rights, the environment, and many others. perceived a lack of transparency around the signing and Recent years saw a rapid rise in environmental- and implementing of this contract to be the main reason behind the mining-related activism among civil society organisations. While government’s signing what they felt was a bad deal. Civil society the growing emphasis on this issue can partially be attributed to groups emerged demanding transparency about contracts and political events such as elections and the desire of politicians to full disclosure of what Mongolia receives in compensation for its use mining-related issues as a centrepiece of their agendas, the extractive resources. main reason for this rise in activism was a sense that the mining Another major mining issue raised by Mongolian civil society sector was being poorly managed and was not benefiting the was the environmental destruction which mining operations can Mongolian society as a whole. cause. Companies neglected environmental standards, and fared poorly on rehabilitation. use of poor technology and obsolete The rise of civil society activism around mining equipment, the tendency of placer gold mines to be located in like many countries trying to revive their economy and lure river basins, the use of river water for gold extraction and putting foreign investors in the early 1990s, Mongolia adopted a very waste into rivers resulted in numerous reported cases of pollution competitive tax and foreign investment regime, especially in and some rivers drying up. This, combined with the low mining, and formally supported the industry through a so-called regulatory enforcement capacity of the government, led to ‘Gold’programme. This resulted in a large inflow of foreign and environmental problems which started affecting rural livestock domestic investments in the mining sector, both for new herders as pastures and water resources became scarce. Many exploration and exploitation of discoveries made in the Soviet civil society groups, especially at the grassroots level, emerged in era. Gold production soared, and so did the production of other reaction to environmental concerns around mining, and ultimately minerals such as coal, fluorspar and iron ore, to name a few. some of these groups went beyond environmental issues in their Overall, Mongolia’s mining sector grew from 10.1% of GDp in quest to bring about more responsible mining practices. Figure 1. The number of registered NGOs in Mongolia, official statistics 6000 1600 1400 5000 12000 4000 10000 3000 8000 6000 2000 4000 1000 2000 0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of NGOs Number of Employees 0 ADVANCINGTHE EITI INTHE MINING SECTOR Additional issues that prompted civil society activism on mining were the learning, sharing and capacity-building experiences issues include: with civil society groups in other countries, as well as the access • an interest in more transparent and equitable schemes for to first-class experts to share lessons learned. Five representatives sharing revenues from mining between central government of this coalition were included in the multi-stakeholder working and the provinces; group established to support the EITI National Council. It is • corrupt behaviour of local government administrations in notable that the EITI Working Group includes two other civil their relationships with mining companies; society members who are not in the pWyp coalition. • low levels of job creation and local content/hiring by mining Arguably, civil society was largely responsible for the industry; and government endorsing the EITI in Mongolia, complemented by • large inflows of people to mining regions from elsewhere in the efforts of the World bank and others. The Open Society the country, including informal artisanal miners, and related Forum discussed the possibility of Mongolia joining the EITI with increased burdens on the social infrastructure of mining several parliamentarians, and arranged visits for the heads of areas. parliament standing committees on fiscal and economic policies In this light, the initial rapid emergence of different civil society to visit kyrgyzstan, one of the early endorsers of the EITI, to learn groups working on mining issues received wide support from the from their experience. These two standing committees then public, and campaigns included public demonstrations organised a joint session in which they recommended that the and the use of media outlets for voicing their concerns. This government consider endorsing the initiative. This approach by activism became more organised over time and evolved into civil society was motivated by the fact that the parliament more sophisticated policy discussions and advocacy efforts on traditionally has a strong influence on the executive branch of the part of civil society. The government and the industry the government in Mongolia. Support by the parliament was in turn had to come up with strategies to interact and build especially important, in that they would later include a clause in dialogue with these new stakeholders. A responsible mining Minerals law, as demanded by certain civil society groups, which initiative was conceived to promote high standards and requires mining companies to publish their financial payments to multi-stakeholder discourse: the so-called“river movements”, the government publically. This has proved vital which are grassroots environmental movements, joined forces for civil society in its arguments with the industry and the and organised the land of My Mongolia coalition, to advocate government to implement the EITI and adopt disaggregated for better environmental standards and practices. In 2006, reporting. the government, parliament and industry organised Through National Council participation, and especially multi-stakeholder discussions and hearings before Mongolia’s effective participation in the Working Group, civil society was new Minerals law was adopted. This was the first time able to influence most of the critical issues in implementing the discussions of this sort were organised around the mining sector, EITI. For instance, the coalition received draft templates for EITI and came about at the height of civil society activism on mining reporting, and successfully argued for the inclusion of all issues. In this context, Mongolia’s adoption of the EITI was a effective taxes, payments and fees that companies pay to the natural next step, given the high demand from the public for government, and for reporting on all donations and grants to greater mining transparency, and the interest of government, central and local governments, which are often a subject for parliament and industry in more formally engaging citizens in alleged corruption and non-transparent use. Even VAT payments mining policy formulation and oversight. and reimbursements were included in the initial templates. The pWyp Mongolia coalition paid special attention to The EITI and civil society promoting the EITI to the general public, especially in mining The Mongolian government endorsed the EITI in early 2006, regions. Even before the first official EITI report was produced, following significant advocacy efforts by some civil society the civil society coalition organised a series of multi-stakeholder groups, headed by Open Society Forum. At the same time, a events in major mining provinces, in effect launching the EITI multi-stakeholder National Council to organise and oversee EITI during these events, as companies operating in the region, and implementation in Mongolia was established, and three civil local governments, reported their financial payments and society representatives were included. In August 2006, 16 receipts. largely focusing on the EITI, these events also allowed non-governmental organisations decided to establish a formal participants to highlight issues going beyond the EITI, such as civil society coalition, publish What you pay and Earn (pWyp contract and licensing transparency, effective use of mining Mongolia), to coordinate their efforts in participating in and revenues, and even environmental issues. The coalition also used advancing the EITI. The pWyp Mongolia coalition received the media to promote EITI principles in general and bring the invaluable support and advice from the international pWyp public’s attention to certain controversial issues. and its regional networks, as well as through Revenue Watch The first EITI Mongolia report, produced in January 2008, Institute and Open Society Institute partners. Especially valuable provided civil society with the opportunity to engage in a ADVANCINGTHE EITI INTHE MINING SECTOR 1 dialogue with the government and companies over substantive and another quarter is undecided (the fourth quarter had no issues in the mining sector. The report identified important opinion). Opposition likely comes from the fact that some civil shortcomings, such as gaps in reporting and communications society groups employed certain confrontational methods in between different levels of government and different advancing their agenda – demonstrations, non-substantiated government agencies, and a large number of payments accusations, etc. – that have not sat well with many peoples. unrecorded in government books. The report also provided a On specific ways for civil society to engage in mining issues, general sense of what mining companies contribute to the only 6% support demonstrations, and only about 10% support economic and social development of the country. pWyp coalition any litigation actions against mining companies or the members discussed these results with the local communities government through the court system. About half of those and general public, and also demanded further action on questioned would support more constructive ways of investigating and explaining the reasons for the gaps in the engagement, such as conducting research, preparing policy government and company reports. In response, the National recommendations for the government, monitoring government Council turned to the National Audit Office to audit the report actions, distributing information to citizens and collaboration in more detail. In short, the report provides a variety of with the government. Of those surveyed, 80% believe that the opportunities for civil society to engage in constructive dialogue government is most responsible for delays in investments in and analytical work, and push for specific changes in policies mining projects in recent years (as opposed to civil society); governing the mining sector. however, about 34% think that civil society organisations have also contributed to investment delays due to outright opposition The future of civil society activism on mining and the EITI and unconstructive engagement. in Mongolia While these results are from a survey that considered the Going forward, the issue of how civil society engages in the EITI involvement of civil society in mining issues broadly, the EITI’s in Mongolia is of key importance. At present there are questions constructive multi-stakeholder approach appears to be squarely about whether the national pWyp coalition truly represents civil in line with public preferences. society, and whether there is room for other civil society actors to meaningfully engage in the EITI. This is especially important, Going beyond the EITI given the large number of civil society organisations focusing on There are important mining-related areas where civil society in different mining issues, and also that there are competing Mongolia would like to achieve greater transparency and international agencies and organisations supporting civil society openness. One area that has been a subject of much controversy activities relating to mining. The obvious example is the is the licensing stage in the mining value chain. Due to the very emergence of the Responsible Mining Initiative, which also liberal mining regime established in late 1990s, Mongolia at employs a multi-stakeholder approach and focuses on the some point licensed about 42% of its territory, either for principles of transparency in the sector, including licensing, exploration or mining activities. Currently, about 5,000 licenses contracting and revenue transparency – the initiative is are held by companies from around the world. Mongolia’s supported by the Asia Foundation, a significant international proximity to China, the main market for its commodities, and the non-governmental organisation active in Mongolia. Although it abundance of already discovered natural resources, makes shares the objectives and principles of the EITI, the Responsible Mongolia an attractive destination for mining investments. Mining Initiative does not make the EITI its focus, or mention it in Despite some improvements, the licensing process remains its documents. At the same time, the pWyp coalition is the only non-transparent, and the selling and buying of licenses takes one represented on the EITI National Council, so other civil place without government or public control, creating suspicions society groups may feel disenfranchised in terms of the EITI. In of corruption. that sense, both the government and the pWyp coalition will Another area where civil society is interested in seeing more need to ensure that other civil society groups feel welcome to transparency is in stability and investment agreements over the participate in the EITI, given the abundance of civil society use of major mining deposits. These agreements are especially engagement on mining issues and various related initiatives. important for government revenues and in terms of the public In a recent public opinion survey, conducted in ulaanbaatar having some sense that Mongolia is getting its fair share of the City, on the role civil society organisations play in the mining wealth derived from mining activities. Many Mongolian mining sector, 53% of the respondents supported the engagement of activists believe these contracts should be made public. Some civil society in the mining sector issues, while another 37% civil society groups, including the pWyp coalition, are currently would support it depending on the issue on the agenda. trying to monitor licensing movements and advocate for Reflecting upon their own engagement, one quarter of civil contract transparency. Civil society would like to play a society mining activists think their engagement has had a meaningful role even before licenses are issued or contracts are positive impact, while another quarter considers it negative, signed, which is their main challenge in Mongolia today. 2 ADVANCINGTHE EITI INTHE MINING SECTOR How revenues received from mining are used is also under It can be a good idea to have doors open for non-coalition civil increasing scrutiny by civil society, as governments tend to use society actors to EITI structures such as the National Council and large windfalls for their political aspirations, leaving serious Working Group. questions about the efficiency and stability of expenditure Is there a legal basis to support the EITI? Working with programmes. At the same time, inter-governmental revenue legislature, Mongolian civil society has achieved two objectives: distribution – between different levels of government and the endorsement of the EITI by the government, and a legal basis between mining and non-mining regions and the central for implementing the EITI in the form of a legal clause requiring government – is emerging as a significant issue as mining transparency of payments. This is essential, especially in the revenues increase. Civil society sees a need for engagement mining sector, where there are many actors in the industry and here, as certain mining provinces will have significant revenues not all companies would voluntarily join the EITI or agree to the to spend while their capacity, planning, and transparency level of disaggregation in EITI reports. practices remain limited. Additionally, non-mining regions are at Is civil society considered a serious partner? There are many risk of lagging behind in development. budget expenditure instances, such as commenting on templates, scoping the EITI, issues, and monitoring of revenue allocations and expenditures selecting auditors, monitoring implementation, etc., where at the sub-national level, pose new challenges for civil society, in civil society has opportunities to engage in dialogue and terms of capacity, skills, resources and a legal environment for decision-making, but it should be well prepared to add value to meaningful engagement. the process in a constructive manner. In that sense, civil society, It remains to be seen in Mongolia whether these issues will be which has less expertise in mining than government officials and addressed under the current EITI structure, taking advantage of industry representatives, needs to constantly improve its own its multi-stakeholder approach, or whether other forms of capacity. building international networks, with such organisations oversight and reporting mechanisms will be created to address as pWyp International and major institutions like the Revenue concerns in other areas of Mongolia’s extractive value chain. Watch Institute, the Open Society Institute, the World bank and the EITI International Secretariat, is crucial for this purpose. lessons learned Does the EITI matter at the grassroots level? Reaching mining Civil society engagement in the EITI has been especially communities in major mining regions has been an important productive, as the way the EITI is set up provides an opportunity issue for the pWyp coalition in Mongolia. At the end of the day, for equal participation from industry and government when local citizens – who experience the many negative effects representatives, with civil society as a major driving force of mining at first hand – see the benefits they receive from behind the whole initiative. Many issues and challenges have mining, they will issue their“social license”for the industry to been highlighted during the EITI process, and the following are operate, thus making the industry sustainable and responsible. a few of the most important lessons learned for civil society Also, an EITI framework at the local level would provide an from implementing the EITI in Mongolia. important mechanism to address issues such as licensing, Are there limits to coalition-building? Mongolian civil society contract transparency, and spending of mining revenues. is dynamic and diverse, and employs different methods to Is civil society a leader in the EITI process? Even though the EITI achieve its objectives. The pWyp coalition was especially careful is a multi-stakeholder process, it is often civil society that drives in having its message and EITI engagement coordinated, so that the process. Civil society must always be an active driver if the certain groups do not‘free-ride’,and others do not abuse the EITI is to achieve meaningful results. unless civil society is active coalition and its name for their own organisation’s purposes. yet and constructive, it will lose its momentum and credibility. other important groups with related agendas remain outside Finally, the EITI provides an opportunity for civil society to the EITI fold, and it remains to be seen whether working engage as equal partners in policy issues going beyond the EITI. together is possible and preferable in advancing the mining Many other issues, including non-mining issues, could be transparency and accountability agenda in Mongolia. addressed using the EITI multi-stakeholder approach. This Can civil society outside the coalition get involved in the EITI, approach would bring a new way of governance in addressing either through joining the coalition or independently? Trying to public policy issues. That should remain a focus of civil society. include every civil society in the EITI process is simply not feasible. On the other hand, unless the coalition is open to Dorjdari Namkhaijantsan is the Manager for Economic Policy Issues at everybody, and its management is transparent and dynamic, the open Society Forum in the Mongolian Foundation for open other civil society groups and stakeholders will not accept the Society. coalition as true representatives of civil society. Especially with Notes mining, there are often a large number of environmental, social 1 IMF World Economic Outlook, based on estimated GDp per capita in and human rights interest groups that may not be part of constant prices of $517 in 2002 and $1485.74 in 2007, revenue transparency coalitions but have a stake in the EITI. http://www.econstats.com/weo/CMNG.htm. ADVANCINGTHE EITI INTHE MINING SECTOR 3 11 TAkINGTHE SpIRIT OF EITITOTHE Sub-NATIONAl lEVEl: ThE CASE oF PERU FERNANDo RUIz-MIER1 background governments were in a position to effectively turn those Gold mining by Newmont Minera yanacocha (My) in the resources into works that could improve people’s lives. Department of Cajamarca, northern peru, has been going on Thus, while the availability of resources created a potentially since 1992. The vast open-pit mine has been extremely significant opportunity to promote development, there was also profitable, particularly in the last few years. To the delight of the risk of resources being squandered. Contributing to this risk shareholders, between 2005 and 2006 pre-tax net income was the fact that civil society in a provincial setting was too weak amounted to uS$1.6 billion.2 Nonetheless, living standards were to exercise effective social accountability. In Cajamarca there was not improving for a significant proportion of the people living in very low awareness on the part of citizens of their rights to the area. They remained poor, and felt they were getting little information and participation, let alone any effective exercising return from the significant wealth they saw being taken from of such rights. There were extremely low levels of understanding their soil. understandably, by 2004 feeling in Cajamarca was on the part of the local population of the resources available and highly polarised in favour of and against the mine. what was being done with them. All this meant that local Revenues from the mine contribute significantly to the government officials lacked adequate incentives to adopt the national government’s income, as it takes 30% of the mine’s necessary reforms and ensure that their institutions quickly and profits. As of July 2001, when the Mining Canon law was effectively made use of resources to improve the delivery of enacted, 50% of these tax revenues have been transferred to public services to their constituents. regional and local governments around the mine to be invested Recognising that the efforts to build capacity in local in local projects.3 The idea behind these transfers is governments needed to be complemented with demand-driven straightforward: the local population should benefit from the governance initiatives, the International Finance Corporation presence and operation of a mine in their area. (IFC), which holds a 5% stake in yanacocha, initiated a pilot There was no doubt that the operations of My represented project which had two components. The first helped enormous potential for economic and social development at the municipalities build investment capacity. The second helped civil local level. However, it was recognised early that this would not society organisations (CSOs) to become more active and effective be achieved automatically and that the availability of financial in monitoring mining revenue transfers and investment, resources in itself was not sufficient. Investment had to be engaging local governments, and demanding social undertaken by local governments with very weak administrative accountability on the part of their local authorities. capacity,4 and this meant that in spite of receiving resources, the The fact that some municipalities had been receiving, and will municipalities close to the mine were unable to take advantage continue to receive, significant amounts of resources was seen as of them. Much needed to be done to ensure that local an important opportunity to bring the EITI to the municipal ADVANCINGTHE EITI INTHE MINING SECTOR government level, where decisions on how to use the resources To tackle these challenges effectively, the pilot sought to are made. In peru the right ingredients were in place: a ensure that: i) the initiative was independent of the polarising Transparency law, requiring public information to be made discussion around the mine, ii) neutral with respect to how available; a participatory budgeting law, allowing communities municipalities were approached, avoiding a vigilante attitude to identify the projects they need and to have them placed in the that focused exclusively on identifying questionable issues, and local investment budget; and the necessary legal grounding for iii) the role of facilitating information flows and greater Vigilance Committees to be established by community understanding would stop short of engaging in advocacy, to representatives (which, in general, had not been effective). avoid potential conflicts of interest. The question was how best to take the spirit of the EITI to the The IFC designed a pilot project7 to help implement a local level. CSO-based independent mechanism in Cajamarca which part of the answer, at least in the case of peru and from the involved structuring an MIM that could effectively undertake IFC’s perspective, was to place more weight on publicising the three recurring actions to bridge the distance between municipal availability of resources and to help civil society establish authorities and citizens. The three actions – to disseminate conditions for them to be well spent, rather than simply verifying information, provide feedback, and stimulate a local debate – that the right amounts were being transferred.5 It is against this would combine to generate greater accountability. As the backdrop that the IFC decided to undertake a pilot project in diagram below illustrates, the effort of disseminating municipal Cajamarca. The project, know as MIM,6 started operating in information helped to inform the population and provide October 2005 from an office at the National university in authorities with a way to communicate what was being done Cajamarca. The pilot stage was finalised in October 2007. with the resources. The feedback given to authorities was a way of providing citizens with a means to voice their opinions, while present providing municipal authorities with community input into The objective policy planning. The objective of the pilot was to establish and support the The MIM was structured so that it could: operation of a mechanism that could promote greater local 1 undertake systematic monitoring of mining revenue flows government accountability and demand-driven improvements and municipal investment; in local governance. This would lead to local governments 2 inform the population in general as to the magnitude of improving their investment capacity and increasingly focusing resources received and how they were used; investment on meeting the needs of local populations and 3 provide systematic feedback to mayors as to how their delivering improved services. management of investment was perceived by the population; and The challenges and approach 4 promote an open debate so as to achieve greater From the outset it was recognised that the challenge required understanding of the mining canon and municipal going beyond merely providing information. A new dynamic in investments, and engage civil society and authorities in a the way local authorities and citizens relate needed to be discussion to identify different options and evaluate their introduced. To accomplish this, it was recognised that there was a merits. need for an integrated approach which would: i) facilitate The pilot MIM covered two municipalities, the provincial two-way information flows from local governments to citizens, municipality of Cajamarca and the district municipality of baños and ii) promote a much needed local debate to generate a better del Inca. This enabled comparisons that would act as references understanding of what the resources meant and to discuss the and promote healthy competition. best uses for such resources. Towards social accountability Promoting an informed local public debate and facilitating dialogue between civil society organisations and local government Communicate Is informed Disseminate information what it does Understands Promote debate Provides context and explanations Can voice an Gets ideas to make Provide feedback Source: IFC-MIM Peru Project opinion adjustments ADVANCINGTHE EITI INTHE MINING SECTOR What it did and how it worked revealed priorities in terms of sectors)? How quickly is investment The pilot project, and how it operated, can be described in terms progressing? The comparison of such snapshots over time allows of five building blocks: the institutional arrangement, the people to get a sense of progress made and how things evolve. treatment of information, the approach to disseminating information, the manner in which feedback was generated, Dissemination of information and the promotion of debate. The dissemination of information started in a somewhat traditional manner, with periodic printed bulletins and popular Institutional arrangement reports being distributed. The former, more demanding The institutional structure of the project comprised a board documents were aimed at a relatively sophisticated urban composed of representatives of the participating local civil audience, while the latter, simpler material had a significantly society institutions, a three-person technical team of young local wider distribution. The different options for putting material out, professionals, and an Advisory board composed of invited as well as the targeting of specific audiences, evolved over time. reputable personalities. The IFC provided support in the form of Media releases became important as a means of generating a technical assistance for the organisation of the MIM, the more permanent presence and getting the media involved. development of the methodology, and guidance for the Interested citizens could register to receive frequent updates on operation of the MIM. In recognition of its relationship to the EITI “findings”,and“education pills”,by email, the latter providing strategy being discussed in peru at the time, an agreement with brief explanations of basic concepts. The development of a web the Ministry of Energy and Mines (MEM) was signed and the page made all this information available on demand and brought initiative was recognised in peru’s Action plan for EITI the possibility of consulting certain municipal data. Finally, to implementation. reach rural audiences more effectively an agreement with a radio The project explored new ground in its selection of local station to have a short weekly programme was made, and visits partners to generate the credibility it needed. local well- to communities were scheduled to coincide with meetings established civil society organisations with recognised technical between leaders of communities of the same river basin. capacity and an interest in enriching the debate (without an agenda-driven position for or against mining) were chosen. Providing feedback As a result, rather than NGOs, the project recruited key entities To bring authorities and citizens into a more productive dialogue, from academia (the public National university in Cajamarca and a mechanism for the population to express their questions and the private university Santiago urrelo), business associations (the concerns was put in place which included different options for Cajamarca Chamber of Commerce), and professional associations providing relevant and useful feedback to authorities. The main (architects, economists, sociologists and engineers). component was a grading system, in the manner of an aggregate citizens report card, whereby people assigned scores Treatment of information of their local authorities’general performance and investment From the outset it was clear that there was a need to make it performance. The scores, based on representative surveys, were much easier for the local population to access information. published biannually. In addition, the MIM’s publications It was also important to focus on the“right”information, provided discussion spaces for the populace and civil society recognising that more is not necessarily better, and on how to organisations to express their opinions and pose questions to present it. While collecting and systematising canon transfers their mayors. As a way to promote dialogue, this evolved into a and municipal investment information is a necessary and more structured practice that involves the MIM’s Technical Team demanding activity, it had to be guided by the answers to basic collecting, systematising and presenting to municipalities the criteria questions: What are the questions on people’s minds? questions and concerns expressed by the local population. What are their areas of concern? What data is of interest and of use to them? Promotion of debate The approach adopted was based on a simple idea: to develop Without a doubt the biggest challenge was to find ways of two“snapshots”,as a way of synthesising key information that ensuring that the information being made available could be put could answer the most basic questions people had. The mining to use. There was a clear need to find a way of shaking off public canon snapshot provided information that answered three apathy and moving from an absence of open public discussion to questions: How much mining revenue did the municipality an active attitude. With this aim the MIM organised workshops receive? How much did it use? And how much was left (or with mayors,8 thus engaging them directly in discussions while accumulated)? The investment snapshot focused on providing providing them with an opportunity to clarify and add relevant data to shed light on a similar set of basic questions: What is the considerations for proper interpretation of the results of the size of the investment programme (in number of projects and monitoring effort. The results of the monitoring effort were also total amount)? Where is the money going to (what are the publicly presented to large audiences and the media. The media ADVANCINGTHE EITI INTHE MINING SECTOR was further engaged with training workshops, with the double developing standardised tools. The project is also promoting an objective of explaining the material being put out and institutional network that now integrates 28 local institutions generating greater interest on their part. That effort was from five MIMs covering 12 municipalities. Over time the new complemented with the practice of publishing interviews of MIMs, which cover two municipalities each, are expected to recognised citizens reacting to the MIM’s information, thus grow as the Cajamarca MIM has grown (it now covers four allowing different voices to be brought into the discussion. municipalities). In recognition of the merits of the project, its innovative approach, and the potentially high impact it can have, Initial accomplishments three important donor agencies, the DFID, CIDA and uSAID, between 2006 and mid-2007 the MIM pilot in Cajamarca expressed their support by joining the project as strategic had started to successfully increase civil society’s access to partners. As this effort grows, the challenge will be to integrate it information on mining revenues (from 39% to 60%), the with other national and regional level initiatives and to move population’s understanding of mining royalties and their use ahead with some of the ideas proposed for making the initiative (from 37% to 44%), and the population’s awareness of their sustainable over the long run. right to request information on the use of mining royalties flows building on this experience, the IFC has started to work (from 46% to 59%). As a result, an open discussion on municipal with four Comités de Regalías overseeing 11 municipalities in investment had slowly started to take place. The mayors were Colombia to help them adopt the methodology and lessons from aware they were being monitored, and consequently started to Cajamarca. The IFC has now started to evaluate the extent to be more responsive to the populace at large. which this experience and methodology – together with the In the course of its work the MIM pilot has successfully lessons from other demand-driven governance reform efforts positioned itself as the local reference on municipal investment of the WbG – might be applicable and could be brought to in several ways: i) it has been accepted by authorities, with countries in Africa and Asia where extractive industry activity mayors or their key staff actively participating in the MIM’s is significant and where an important share of resources is workshops, ii) media coverage has greatly increased, channelled back to sub-national levels. iii) it frequently receives requests for municipal investment information (from, among others, candidates for the mayoralcy lessons during the previous electoral campaign), iv) Cajamarca’s Taking the spirit of the EITI to the local level introduces new Regional president asked the MIM to consider monitoring his issues and requires new approaches. In the Cajamarca pilot the administration, and v) the MIM's list of citizens that register focus was shifted to how the money was being used and to in its“Network of Informed Citizens”to receive periodic generating conditions for a closer relationship between citizens information has been growing. It also helped to shift the and authorities. Many lessons have been learned which have discussion from what the mine did to how best to take been incorporated in the MIM peru project in the form of advantage of the public resources it generated. practices. Some of these are mentioned below. Future lessons for improving the methodology Given the mining tradition of the country and its proven • Remaining on public agenda potential, it is clear that mining is in peru to stay, and, given – It is essential to have a continuous presence so as to current legislation, its contributions to sub-national budgets to maintain interest. Rather than putting out information remain significant. In 2007 income taxes collected from mining periodically, therefore, a continual flow of information companies amounted to approximately uS$3.44 billion, of should be generated. MIMs now disseminate“findings”on which uS$430 million was transferred to regional governments a weekly basis, in addition to other more elaborated and uS$1.29 billion to local or municipal governments. Clearly materials, and offer information on demand via a web the need to strengthen sub-national governments as well as platform. CSOs will remain a significant challenge and should receive a • Identifying and targeting audiences more effectively very high priority.9 – An effort should be directed at identifying the“natural The IFC has developed and is now implementing the users of information”,those which will become engaged in “Strengthening Social Accountability to Improve the Impact the debate and could be effectively involved in advocacy. of the Mining Canon”project in peru (MIM peru for short), Such users should be registered and their information which takes the Cajamarca pilot experience with civil society needs clearly understood. organisations to four additional regions that together with the – The need to innovate beyond traditional dissemination Department of Cajamarca receive 80% of all mining revenue practices has proven particularly useful at the local level. payments in peru. The project is improving the methodology be open to exploring alternative means of disseminating tested in the pilot by incorporating the lessons learned while information to get the message out. ADVANCINGTHE EITI INTHE MINING SECTOR • Providing focused (action-oriented) feedback to mayors Competition by comparison can go a long way in – periodically providing a general grading of municipal translating the message from civil society to authorities performance, as well as other survey information, is useful into action. to mayors and brings them to attention. This general – Similarly, performance comparisons, in terms of outputs grading can be complemented with municipal service and outcomes, across MIMs can work very well to identify report cards providing more focused feedback that can good and bad practices and to motivate weak performers identify, in a more actionable manner, investment needs. into being more effective. • Promoting a culture of social accountability – Establish trust with municipal authorities and officials, Fernando Ruiz-Mier is Senior operations officer at the International making it clear that a two-way flow of information is in Finance Corporation’s office of Advisory Services in Latin America and their interest. the Caribbean. – provide and publish a measure of social accountability reflecting the degree to which the population feels informed by authorities. lessons that contribute to success Notes 1 The Senior Operations Officer, IFC Office of Advisory Services in latin • Select the right partners and building capacity America and the Caribbean, was the person in charge of the pilot – Work with local institutions that are sold on the idea and project. The author is grateful to comments made by a reviewer. Any see it as a voluntary contribution, not those that seek to comments on this chapter can be sent to the author at [email protected] reap a benefit. Work on maintaining the commitment and 2 Figure based on the mining canon reported by yanacocha for the two enthusiasm of those involved. years, representing 50% of income tax paid, which is 30% of pre-tax net – break down the idea of“promoting accountability”into income (http://www.yanacocha.com.pe/plantilla.asp?v_men=7&v smaller pieces: information processing, information _pla=1&v_tipo=M&idi=E). dissemination, providing feedback to authorities, and 3 These transfers have become generally known as mining canon. generating debate. Identify the tasks involved in each of 4 With respect to investment, development planning, and project these, and the technical abilities needed to undertake design, implementation was particularly weak. More important than them successfully. Develop and establish procedures for verifying the exact amounts transferred under well-defined – albeit each piece, and put together Technical Teams according to complex and often-changing – rules, was ensuring good use of the the abilities required. resources that were accumulating. An acronym for both Mecanismo • MIM works best when there is a complementary effort to Independiente de Monitoreo (Independent Monitoring Mechanism) and Mejorando la Inversion Municipa (Improving Municipal Investment). provide support to municipalities – Municipalities desperately need to improve their capacity. 5 The basic premise of the project was that, in order to be in a position to An effort to promote accountability and good use of contribute, the population needed not only to be informed but also to understand the nature of the MC and of municipal investment, as well resources will only go so far if municipalities do not have as the context in which decisions had to be made. It was further access to methodologies, advice, and other initiatives that recognised that ordinary citizens also needed an incentive to make the can help them strengthen their investment capacity. In necessary effort to go over the information and understand it. This peru the IFC has a sister project to provide municipalities incentive takes the form of the chance to voice an opinion that can be with such resources. heard, can be taken into account, and, potentially, can help to induce – Information is key, though sometimes it is not provided – changes that will improve government practices. not because of a desire to hide it but because it is not 6 The two mayors of the municipalities being monitored assisted these readily available. workshops about half the time. When they could not attend they always • The importance of a national network sent a team headed by the municipal manager, which included managers of key areas. – The sense of“not being alone”that comes with participation in a structured network of people fighting 7 While some assistance has been provided, it is clear that more is the same battle provides significant stimulus to those needed and various groups have lobbied the World bank seeking bank involvement in peru’s mining sector. people involved in the project. A network also allows for sharing experiences and learning from each other, a great 8 The two mayors of the municipalities being monitored assisted these source of ideas and improvements. workshops about half the time. When they could not attend they always sent a team headed by the municipal manager, which included • Benchmarking and competition managers of key areas. – Ranking local government, based on how their 9 While some assistance has been provided, it is clear that more is performance is rated by their citizens, and publicising the needed and various groups have lobbied the World bank seeking bank results, is a powerful tool for generating a response. involvement in peru’s mining sector. ADVANCINGTHE EITI INTHE MINING SECTOR 12 TRANSpARENCy AT THE lOCAl lEVEl: ThE CASE oF CERREJóN IN ThE GUAJIRA REGIoN IN CoLoMBIA ALExANDRA GUáQUETA Introduction guerrilla organisations. later on, extreme right-wing illegal This chapter examines Cerrejón’s transparency initiatives in la armed groups, the so called paramilitary, mushroomed Guajira, a province in the north of Colombia. Carbones del throughout the country to counterbalance guerrillas and make Cerrejón ltd., owned by Anglo American, bHp billiton and up for state weaknesses. The Colombian public was well aware xstrata, operates one of the largest open pit coal mines in the that armed groups had used the illegal drug business and world. Its current coal production, 32 million tons, is sold in the kidnapping to fund the war machine. lesser known, however, international market and represents 6% of Colombia’s exports, was the alternative source of money and political control: oil 0.8% of national GDp and 51% of la Guajira’s GDp.1 A decade and mining royalties paid by companies to the national ago, amid the escalation of armed conflict, government and government, the majority of which, according to legislation, large extractive businesses became highly concerned with the were transferred to local provinces and municipalities for social transparent and effective use of oil and mining royalties by local and infrastructure investment. provinces and municipalities. local administrations had become It was Occidental petroleum’s tragedy in the oil-rich province a target of illegal armed groups intertwined with public of Arauca that first raised awareness among Colombian corruption. Colombia was not a traditional resource-rich authorities and paved the way for concerned extractive industry country, but the political economy of conflict called for stricter companies to do more about transparency and revenue controls on royalties. The case identifies opportunities for management. For years, the Ejército de liberación Nacional businesses to promote transparency, through (ElN), the second largest guerrilla group in Colombia, had used institution-building, information disclosure and citizen coercion and co-option to tap into Arauca’s royalties, managed oversight. The issue of transparency is becoming increasingly by provincial and municipal officials. They would rely on corrupt relevant for Colombia, as the oil and mining sectors rapidly or sympathetic officials to inflate the real costs of contracts expand. allocated to build schools, hospitals and roads, or threaten officials and contractors, asking for security payments in background exchange for a“safe”operating environment. In 2001 the FARC In the 1990s, Colombia’s armed conflict escalated, reaching and the ElN began competing over the royalties, which critical security problems in 2000-2002 when the peace unleashed an unprecedented spate of attacks, 171 in one year, negotiations between the Andrés pastrana administration and against the Caño limón oil pipeline.2 The situation uncovered the major left-wing guerrilla group, the Fuerzas Armadas the nefarious links between extractives, corruption and armed Revolucionarias de Colombia (FARC), stalled and failed. Conflict groups that undermined the well-being of communities, the had begun in the 1960s, with the emergence of several Marxist interests of extractive companies, and peace.3 Several extractive ADVANCINGTHE EITI INTHE MINING SECTOR multinationals exercised strong leadership by drawing the • First, it opened disciplinary and penal investigations against attention of the national government and encouraged public officials. These were carried out by special teams from immediate oversight and intervention. Subsequently, new the Procuraduría (in charge of inspecting the conduct of initiatives were launched to protect local administrations. These public servants), the Contraloría (National Comptroller’s were based on a key paradigm shift among oil and mining Office in charge of inspecting public accounting) and the companies in Colombia: that the appropriate use of royalties by Fiscalía (the Attorney General’s Office). local authorities was in their interest. It became apparent that • Second, it used the National planning Department’s power companies’security and scope of action to maintain a social to withhold the transfer of royalties to sub-national level license to operate necessitated“going beyond the fence”.In the agencies. Subsequently, this pressure mechanism was future, transparency and institution-building to strengthen the institutionalised and introduced clear rules for provinces State, not replace it, would become a common feature of and municipalities as well as the option to temporarily corporate social responsibility strategies in the industry. assign the responsibility of revenue management to an alternative body altogether in cases of extreme vulnerability key features of the mining tax regime and implications to the action of illegal armed groups or repeated failures in for transparency the appropriate investment of the funds.5 The mining and oil tax regimes in Colombia are different but • Third, it supported the creation of local transparency and have important similarities: both favour sub-national earnings accountability committees with the participation of in rural, less developed regions where resources are produced extractive companies, national and provincial control and transported. This approach was introduced by the 1991 agencies, local governors and mayors, and civil society, the Constitution, which sought, among other things, to deepen so called Comités de Seguimiento y Evaluación a la Inversión democracy by empowering sub-national administrations. de las Regalías.6 Companies pay several taxes at the national and sub-national business leadership was indispensable. It materialised in the levels for various concepts (income, assets, use of vehicles, port form of awareness-raising within the extractive industry; security, environmental compensation, contributions to public encouraging cooperation among public agencies; lobbying to institutions, import and export tariffs). In addition, they pay prevent investigations being obstructed by red tape; public direct and indirect royalties. The former are disbursed to a political backing; information campaigns raising awareness national-level agency that transfers money to entitled provinces about royalties and community rights; logistical assistance to and municipalities. The latter go into national-level funds that State control agencies (transportation, computers, office space invest in special development projects elsewhere or in the same in remote operation zones) and to the Comités de Seguimiento. resource-rich regions. Current regulation stipulates that the royalties must be used to Cerrejón’s transparency initiatives in la Guajira achieve basic social performance indicators related to health Coal production in la Guajira began in 1984 with an association coverage, education, clean water supply and sewerage and contract between the State-owned Carbocol and Intercor, an drainage systems and to priority development projects approved Exxon subsidiary. In 2000, Colombia sold Carbocol and in 2002 by local administrations.4 Royalties are therefore the main Exxon sold its part. The mine later merged with other four mechanism through which local communities benefit from the neighbouring operations to form Carbones del Cerrejón. exploitation of non-renewable natural resources. Extractive The mining area and the exporting maritime port occupy companies usually complement this contribution with social 68,600 hectares, about 3.3% of land in la Guajira. investment implemented either by Community or public Affairs Compared to other regions in Colombia, la Guajira had less departments or, in the case of Colombia, through foundations. presence of guerrillas and paramilitaries. Nevertheless, it was It is important to note that, given the percentages of royalties not exempt from the problems of corruption and conflict that and taxes payable, the monies that companies allocate to social were visible elsewhere. As coal production increased and prices projects are considerably smaller than royalties. The bulk of the rose, Cerrejón became especially concerned with the issue of financial transfers from companies to the country and to the royalties: local authorities would receive greater funds and communities are the sub-national level royalties and taxes. This attract greedy illegal combatants and unscrupulous officials. explains the strategic relevance of efficient and transparent local In the 1990s, the mine produced on average 16 million tons per revenue management in Colombia. year and paid in total uS$334 million in the form of various taxes, of which 50% alone were royalties to la Guajira. by 2005, The national government activates controls the mine was producing 26 million tons and generating a As of 2002-2003, the national government activated three types similar amount of taxes for one single year.7 Moreover, data of control measures on extractives revenue management by indicated that despite employment, company funded local provinces and municipalities: community projects, taxes and, above all, a steady stream 0 ADVANCINGTHE EITI INTHE MINING SECTOR of direct royalties, la Guajira remained one of the poorest of monies to the indigenous reservation of lomanto. The provinces in Colombia.8 Some stakeholders had begun to information led to the suspension of the mayor, and greater question Cerrejón’s corporate social responsibility, at times efforts to educate and empower the indigenous Wayuu confusing royalties with company-funded programmes. communities entitled to royalties, and it added momentum to In contrast, other members of the community had more trust in transparency efforts. However, the effect and legitimacy of the the company and requested it replace local public administrations committee eventually waned. political and personal interests, in the management of these resources.9 Either way, public expressed through the presence of local public officials on the expectations were calling for greater, not less, business Committee, worked to decrease transparency efforts. Incentives intervention. to identify real problems diminished. In 2007, the Committee Cerrejón’s transparency programmes have gone through was dissolved. three phases: Boosting business leadership and quality oversight Supporting grassroots accountability In 2007, Cerrejón , through a renewed corporate social In 2002, the company began informing employees and the responsibility strategy, intensified its involvement with regional union of the amount of royalties paid in la Guajira. Surprised by actors in an effort to increase trust between the company and the large flow of monies and the ongoing development the communities in its operating areas. The broader strategy challenges in la Guajira, a group of concerned employees, who was based on the premise that fulfilling Colombian legal also exercised community leadership, decided to form citizen requirements was not enough: Cerrejón had to do“the oversight committees (veedurías). Cerrejón supported the idea maximum possible”and follow international best practice. and funded capacity-building workshops for community After several consultations, in 2008, the company launched four leaders.10 foundations to assist la Guajira in solving its most pressing needs, such as access to water (as this is a desert zone), Lessons learned employment not dependent on coal, improvement of the The impact of such committees was limited. According to one socio-economic standards of the Wayuu indigenous community member, they lacked convening power and incentives to (almost half of la Guajira’s population) and improvement of engage local public officials, politicians and control agencies as local revenue spending of royalties through transparency and well as resources to travel inside the region, hold meetings, capacity-building of local governments and community review relevant projects and widely disseminate information.11 members. The Foundation for Institutional Strengthening of la Guajira is Tripartite collaboration between business, public in charge of transparency programmes and operates with a lean authorities and civil society yet high-powered structure. Its main activities have been to In 2004, Cerrejón adopted the Comités de Seguimiento model, promote participatory public auditing through the Visible which was originally created to manage Arauca’s problem with Audits and transparency pacts scheme institutionalised by the oil resources and conflict. The committee functioned through a Colombian Vice-presidency’s anti-corruption office,13 and to formal agreement with the Contraloría and Procuraduría offices provide numerous training opportunities to local authorities. at the national level and participation included the Governor, The Contraloría, the National planning Department (which today province council members, mayors and municipal council has an improved royalties unit) and Transparency for Colombia members, provincial-level control agencies, the provincial have been other key allies. environmental control agency (Corpoguajira), community leaders and Cerrejón staff. It also featured a technical secretariat Lessons learned and existing best practice led by the local Chamber of Commerce and funded by the The Foundation has facilitated initiatives that follow some company. of the main accountability elements of the past: business endorsement, multi-actor oversight committees, active civil Lessons learned society participation, engagement of public officials and The results of this transparency exercise were mixed. In 2005, politicians involved in revenue management and spending, initiatives in the municipality of Hatonuevo were nominated by cooperation with national-level control agencies and disclosure the Contraloría as a successful case.12 This model achieved of paid royalties, funded projects and public contracting. results owing mainly to appropriate funding, the leadership However, it has introduced several changes to the strategy: of business and national-level agencies to convene public • Strong public business leadership. In the past, Cerrejón meetings and raise awareness, as well as to dialogue between facilitated initiatives while keeping a low public profile. citizens and relevant control agencies. The Committee and its Today, its role is explicit, publicised and exercised by staff civil society component detected irregularities in the allocation that devote their full time to the issue. Moreover, to guide ADVANCINGTHE EITI INTHE MINING SECTOR 1 and provide political backing to its initiatives, the favours transparency and reduces the possible effects of Foundation has a six-member board, including Cerrejón’s local clientelism. CEO and two highly reputed external members that have • Awareness-raising though the media. Cerrejón has invited worked in the public sector. local and bogotá-based journalists to write about royalties • High-level attention by the national government. Activities and the Visible Audits programme, maintaining momentum have involved high-level government officials who have for transparency and increasing opportunities for travelled frequently to la Guajira to attend meetings, speak stakeholders to better understand their rights. at conferences and lead capacity-building seminars and workshops. This seems to have increased the political and The road ahead legal costs of corruption and improved efficiency of local Institutionalising multi-stakeholder approaches officials. Still, the degree of pressure on local administrations to transparency needs to be balanced with positive incentives to prevent As is shown through Cerrejón’s case, businesses have plenty of bureaucratic and political paralysis as well as social tensions. roles to play in the promotion of transparency. private • Greater expertise. Oversight is based now on better companies can and must lead or facilitate initiatives, given their technical expertise. The director of the Foundation is a skills and interests. However, they should not act on their own if former law school dean familiar with public spending the aim is to foster an enabling environment in which societies regulation, and the staff includes a political scientist and a and businesses are sustainable. Collaboration with public civil engineer to help detect problems in the construction of institutions and civil society is thus indispensable. Good schools, public housing and health facilities, which make up governance as related to revenue management in local an important portion of revenue spending. The Foundation administration ultimately requires institutionalised procedures, focuses on such resources to act as the Technical Secretariat technical capacity, means to dissuade bad conduct through of the Visible Audits. Oversight has also drawn from disciplinary and penal action (which presumes the existence of government technical expertise on local public judicial institutions and control agencies) and, if there is a administration and development, especially by the National violent context, protection from criminals and illegal armed planning Department, one of the leading technocratic groups. Civil society, be it through community leaders or NGOs, bodies of the Colombian State. In addition, Cerrejón has has a special ability to monitor the conduct of public officials established a working relationship with the Deutsche through a deep knowledge of local dynamics and political Gesselshaft fuer Technische Zusammenarbeit (GTZ) and is legitimacy. looking forward to expanded work by the World bank.14 Collaboration, however, is not always easy, and actors need to • Focused social and fiscal control. The Visible Audits sessions develop common understandings of each other’s unique have focused on only a few, though key, emblematic contribution to the process. Challenges related to violent projects worth uS$26.5 million. These include a water conflict, such as trust and security, also need to be addressed to pipeline across Chorreras, barrancas and Hatonuevo; foster multi-stakeholder interaction. NGOs with larger capacity low-income housing and a park in Albania; and renovations and with experience on multi-stakeholder interaction could lead of the paulo VI School in barrancas, the Alfonso lópez the way for those NGOs that view multinationals with pumarejo public School in uribia, and the Nuestra Señora scepticism and discard cooperation. del Carmen School in Hatonuevo. As a follow-up to the audits, there is ongoing close participatory monitoring until International grounding issues are resolved or projects are concluded. The Colombian government has done robust work on the issue • Prevention through technical training. Cerrejón has of royalties and transparency. This enabling context has allowed strengthened capacity-building to local public officials, private sector extractive companies, such as Cerrejón, to which it funds and facilitates in collaboration with innovate on ways to contribute to efficient revenue management. government agencies, experts, NGOs and foreign donors. Globalisation, however, requires another layer of interaction and The rationale of intense training is to enable corrective legitimacy, as global networks draw threads between small actions that can actually solve problems in revenue villages in the developing world, international markets and the management projects. It is also meant to provide political processes in the capitals of industrialised nations. appropriate tools to local administrations, seeking a Frameworks such as the EITI provide this international long-term impact on the quality of public social grounding. investment. Adjustments to sub-national public management and • Wide civil society participation. The Visible Audits have revenue management procedures assembled between 150 and 400 people at a time, opening Colombia has gone a long way in establishing a thoughtful participation to a wider range of civil society actors. This framework for the investment of royalties. Still there are 2 ADVANCINGTHE EITI INTHE MINING SECTOR ongoing debates, technical and political, suggesting reforms. information on the nature and amount of royalties, community Whatever these may be, adjustments should improve long-term and indigenous peoples’rights with regard to their allocation, development planning by local governments, find ways to and showing figures in a way that makes sense to non-expert counteract possible negative impacts derived from the volatility stakeholders. of commodity prices, diversify away from complete local economic dependence on natural resources, and improve the Dr Alexandra Guáqueta is Public Affairs Advisor at Cerrejón and works planning and auditing capacity of local administrations. on compliance with international corporate social responsibility standards. Meaningful information National agencies involved in the collection and transfer of royalties disclose payments made by businesses. Most companies also do so and inform local communities regularly of accumulated and monthly royalties paid to local administrations. However, there is still much work ahead in widely disseminating ROYAlTIES Cerrejón's payments of royalties and compensations are regulated by different contracts that followed old legislation (law 141, 1994). This regulation enabled the State, through the Ministry of Mines, to negotiate various types of agreements depending on the nation's interests and to the proposals by foreign investors. Since Cerrejón is the merger of five different operations, the company’s payment of royalties is calculated according to five different formulas based, mainly, on the value of production quantities. Royalties range form 8.3% to 15% of production. New legislation was introduced in 2002 (law 756, 2002), establishing blanket parameters for all contracts, making accounting and accountability easier.15 Once the royalties are paid, they are distributed as follows: Direct royalties 42% for la Guajira province 32% for each producing municipality 10% for the port municipality (in this case, uribia) Indirect royalties 16% for the National Royalties Fund, managed by the National planning Department Total royalties and compensations (in US million $) 200 180 160 140 120 100 80 60 40 20 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ADVANCINGTHE EITI INTHE MINING SECTOR 3 Notes 1 Fundación Cerrejón para el Fortalecimiento Institucional de la Guajira, “la contribución fiscal de Cerrejón a las finanzas públicas nacionales y territoriales 2008”, bogotá, December 2008. According to Colombia’s Central bank statistics, total exports of non-renewable resources represent 7.5% of GDp. 2 Alexandra Guáqueta, “political Economic Dimensions of the Colombian Conflict”, in karen ballentine and Jake Sherman, The political Economy of Armed Conflict: beyond Greed and Grievance (New york: lynne Rienner publisher, 2003). 3 “petróleo agudizó la guerra en Casanare”, El Tiempo.com, May 19, 2001; “Gobierno tras las rejas”, Semana.com, October 27, 2003. 4 law 756 of 2002 states that when basic social indicators have not been achieved, provinces must allocate 54% of royalties to projects aimed at reaching such goals, otherwise 90% can be invested in priority development projects of their choosing. Municipalities must follow the same procedure, only with a higher required investment percentage, 67.5%. 5 Ecopetrol and the International Finance Corporation (IFC), “Regalías en Colombia: balance y recomendaciones al marco legal”, April 1, 2008. 6 See details of current State control efforts and challenges in Amparo García, “Control a las regalías en tiempo real y con auditores visibles”, and John Albert Restrepo et al., “El control fiscal a las regalías”, in Economía Colombiana no. 324, 2008. 7 Data based on tables from the Documentation Center of Cerrejón and Mauricio Ferro, “postmodernidad, globalización y desarrollo: un estudio del impacto económico y social del Cerrejón en la Guajira, 1980-2007”, September 13, 2007. 8 Cerrejón employs more than 10,800 people, of which 60% are from la Guajira. 9 Regalías y control ciudadano, internal document, Communications Division, Cerrejón, no date, possibly written in 2005. 10 One of the experts that provided training was the sociologist and university professor Alfredo Correa de Andreis, assassinated in 2004 by paramilitaries in barranquilla. “Ordenó ‘Jorge 40’ el asesinato de Correa de Andreis”, in www.verdadabierta.com, September 11, 2008. 11 Interview with Cerrejón employee Iván Rodríguez, January 6, 2008. 12 Segunda Convocatoria Nacional De Experiencias Exitosas de Control Fiscal participativo, Contraloría General de la Nación, bogotá, September 8, 2005, available at http://www.contraloriagen.gov.co 13 The Visible Audit methodology is based on committing local administrations to publish investment plans and public contracting, gaining civil society access to mandatory auditing, national and local government participation in open accountability meetings with civil society and other agencies, and commitments by local governments to the design and implement corrective actions. 14 In September 2008, a mission by the World bank visited Colombia to identify options for technical assistance in the EITI plus activities. 15 Exact formulas consider other factors. This is a simplified version of the payment scheme. ADVANCINGTHE EITI INTHE MINING SECTOR 13 FACIlITATING CONSIDERATION OF THE EITI IN A lARGE COuNTRy: ThE CASE oF INDoNESIA DAVID W. BRoWN and ChANDRA KIRANA Introduction the climate of regulatory uncertainty. This chapter looks at the experience of successfully assisting The collection, redistribution and publication of accurate and Indonesia in considering whether to join the EITI. Findings are timely revenue information also remains a challenge for civil that a long lead time and much patience are required to bring servants. At the national level the collection of mining royalties large states like Indonesia into the EITI.The fact that developed is the responsibility of the Ministry of Energy and Mineral states are absent from the ranks of EITI Candidates makes the Resources, while the collection of mining taxes is the job of facilitators more difficult. However, enlisting the help of responsibility of the Ministry of Finance. Royalties collected respected, effective, independent and reform-oriented figures by the former are then directly distributed back to local makes the job of facilitators easier. In the case of Indonesia, governments by the latter. Half of all royalties paid by coal firms mining firms have been the strong proponents of the EITI. to the central government are eligible to be redistributed back to the districts in which such coal is produced, but in practice background the mechanism by which district governments can in theory Indonesia is the world’s most populous extractives-rich nation avail themselves of these Coal Development Fees is not well and the only country in the world characterised by the IMF as understood. While representations of revenue sharing with being both oil and gas-rich and minerals-rich.1 The nation is provinces and districts are available on the Ministry of Finance’s endowed with some of the world’s largest copper, coal, nickel website, the data is not available until after the budget cycle and tin reserves, and ranks among the world’s largest producers and, according to many local government officials, does not of these commodities. In recent years, mining has directly and necessarily correspond to actual revenue transfers, creating indirectly accounted for 10% of Indonesia’s economic growth. distrust towards the national government. While Indonesia is consistently ranked among the top nations On the other hand, the national government also distrusts for its mineral and coal reserves and production, the regulatory resource-rich local governments. Many local governments have environment of its mining sector is ranked among the world’s interpreted their new mandate after decentralisation to include worst and no major new minerals investment has occurred in the awarding of small mining licenses, and have issued an the past decade.2 Since the fall of the Suharto government, the estimated 2,000 such licenses, spread across as many as country’s rapid and all-encompassing decentralisation process 10,000 parcels of land, often within the boundaries of larger, has posed a range of challenges, especially in the mining sector. previously existing, nationally authorised mining licenses. From Growth in mining has been hindered by sub-optimal a national perspective, some local mining licenses are illegal. governance and a lack of clarity regarding legal mandates. The Ministry of Energy and Mineral Resources has not been The recent passage of a new mining law adds considerably to able to collect revenues from most of these local firms, or even ADVANCINGTHE EITI INTHE MINING SECTOR obtain definitive information about who many are or where fiscal reform efforts in Indonesia. The IMF’s 2006 Report on the they are located. Observance of Standards and Codes (ROSC) for Indonesia Relationships between mining firms and the government are praised the government of Indonesia for national reforms to also often strained. A recent case of interest in terms of revenue improve transparency, such as the State Finance law, the transparency involves transfer-pricing by some large Treasury law, and the State Audit law. However, it also domestically owned coal companies. Their coal-mining highlighted the lack of transparency in extractive industries’ subsidiaries tend to over-declare the cost of producing coal and revenues, and refers the government to the EITI as an option “sell”that coal to their overseas marketing arms at artificially low for reform.5 because of advocacy from EITI board members, prices. The overseas marketing arms then go on to sell the coal Indonesian and international civil society and the donor onto the world market at the real price. Through this artifice, community, plus active support from some mining companies some coal companies are able to capture the full world price for and the continuous work of an EITI representative based in the coal they sell, while successfully pretending to be less Jakarta, Indonesia finally endorsed the EITI in late 2008. profitable than they really are and short-changing the This was made possible through steadily increasing support government on income taxes. Another matter worth noting for the EITI from most stakeholders. concerns certain large coal producers which believe that the structure of their individual contracts of work entitles them to Civil society advocacy obtain value added tax (VAT) refunds, which the Ministry of In mid-2007, board members of Transparency International Finance contests. As a result, these firms withhold royalty Indonesia visited the Minister of Finance to discuss the EITI, payments to government to compensate themselves for the and later reported that the Minister“supports the transparency unreimbursed VAT. The Ministry of Finance has responded by initiative in the extractive industries sector”.6 The Minister of having international travel bans placed on the heads of many of Energy and Mineral Resources also revealed in meetings that the coal firms concerned. The matter remains unresolved.3 he was favourably inclined towards the EITI.7 When the EITI Civil society also has grievances concerning the transparency Chairman, peter Eigen, met with president yudhoyono in late of revenues in the mining sector. Some civil society figures point 2007, the president insisted that his administration intended to the fact that mining operations tend to cause negative social to be a bulwark against the country’s legacy of corruption.8 and environmental impacts, while at the same time most Finally, in November 2007, 43 NGOs from seven resource-rich resource-rich districts have failed to improve public services or Indonesian provinces came together to form the publish What reduce poverty with the windfall revenues they receive from the you pay Indonesia coalition. Its declaration to the media sector. Although it remains macro-economically sound, announced that one of its main agendas was to promote the Indonesia has not fared well in terms of development: its EITI in Indonesia. The coalition has continued to advocate for Human Development Index is only 0.728, ranking it 107th out of the EITI throughout 2008 and is engaging with a number of 175 countries; 122 million of Indonesia’s people (52.4% of the resource-rich local governments who have informally professed population) live on less than two dollars a day. Civil society support for the EITI and are looking for ways to move forward. believes that extractive industry revenue transparency could help improve this situation, especially by curbing corruption Support from mining companies and improving accountability. In September 2007, the EITI together with the World bank and Much of the lack of trust between and/or among the IFC sponsored a national oil, gas and mining investment government, industry and civil society revolves around how climate discussion. The Indonesian Mining Association sent extractive industry revenues are paid, collected and a speaker to the forum (while the Indonesian petroleum redistributed. At present, no single forum exists in Indonesia Association declined to do so). The published proceedings of within which the extractive industries and the various agencies the forum argued that the EITI would improve the investment that regulate them can sit down to settle unresolved revenue climate for the extractive industries as follows: issues. However, Indonesian stakeholders are beginning to If Indonesia were to adopt EITI, and through that process it was understand that the Extractive Industries Transparency Initiative made clear which types of taxes, royalties and production (EITI) could serve as such a forum. sharing are currently conveyed by firms to the government, this would contribute to a more predicable business environment, EITI progress in Indonesia and information costs would be lowered for new investors. More Indonesia’s support of the idea of transparency of extractive new investment would take place. industries revenues is long standing. In 2003, a deputy minister The head of the Indonesian Mining Association has also written of Environment told a london conference that Indonesia“would a personal note to his membership, explaining why he believes like to do its utmost to implement”the EITI.4 The conversation it is vital to the well-being of the mineral industry for Indonesia regarding the EITI has also taken place in the midst of wider to join the EITI. A number of major companies such as Rio Tinto, ADVANCINGTHE EITI INTHE MINING SECTOR Newmont and Freeport have publicly supported the EITI. In fact, statements on the Initiative. The Executive Chairman of the both Newmont and Freeport regularly report their payments to Indonesian petroleum Association was more circumspect, the government publicly on a quarterly basis. stating only that the IpA would support the initiative if instructed to do so by the government. This was in spite of Developments within the Indonesian government the fact that a majority of the firms sitting on the Executive The EITI, civil society and companies have intensively engaged board of the IpA (seven out of 13) endorse the EITI at their with relevant government departments and ministries for the headquarters levels. last two years, and real progress has been made. Important December, 2008: With the emergence of the global financial milestones include: crisis, a realisation emerged within the Coordinating Ministry for August, 2007: The presidential Adviser for the Environment – a Economic Affairs that extra measures needed to be taken to respected and reform-orientated figure – after receiving a reassure the international financial community that Indonesia’s briefing on the EITI from civil society and the EITI representative, fiscal house was in order. On the last day of the year in 2008, the obtained an agreement from the Minister of Energy and Mineral Coordinating Minister for Economic Affairs sent a letter to the Resources to adopt the EITI on behalf of the government of EITI Secretariat indicating the Republic of Indonesia’s intention Indonesia at the then-upcoming uNFCCC COp xIII meeting in to implement the EITI. bali at the end of the year. However, this never transpired. These milestones have been influenced by various actors and December, 2007: The Anti-Corruption Commission finalised a events. The EITI representative in Jakarta provided dozens of draft of an EITI presidential Regulation. The draft regulation briefings to director- and director general-level officials sanctioned the formation of an EITI Steering Group, specified throughout 2007, and finally, in February and March 2008, was which government agencies and industrial associations would able to deliver detailed briefings on the EITI directly to the belong to it, provided NGOs with the latitude to select their own Ministers of Energy and Mineral Resources and to the representatives to the Group, called for the formation of an EITI Coordinating Ministry for Economic Affairs. Government interest National Secretariat to support the Steering Group, and in the EITI at the ministerial level also seems to have received a identified the types of revenue streams that should be boost from the visit of the former Minister of Finance of Nigeria considered for an EITI process in Indonesia. All stakeholders, (a current Managing Director of the World bank), who had a including companies and civil society organisations, were long and positive discussion about the EITI with the Indonesian consulted in the drafting of this regulation. Minister of Finance. May, 2008: progress was also influenced by civil society efforts to reach • The Coordinating Minister for Economic Affairs, the Minister out to the presidential Adviser for the Environment, Dr. Emil of Energy and Mineral Resources and the Minister of Finance Salim, a well-respected reformer in the extractive industries sat down together in a closed meeting, and a decision was sector globally and nationally. Dr. Salim played an important taken that the latter would lead on the Initiative, assuming role in continuously bringing the EITI to the attention of the the president agreed to Indonesia’s joining the EITI. three most relevant ministries: Energy and Mineral Resources; • The Coordinating Ministry for Economic Affairs convened an Finance; and Economic Affairs. This eventually resulted in the inter-agency working group which deliberated the contents EITI being discussed at the cabinet level. of the draft EITI presidential Regulation prepared earlier by the Anti-Corruption Commission (see above). The future • before Indonesia had a chance to join the EITI, the With the Coordinating Minister for Economic Affairs having sent Coordinating Minister for the Economy moved across to a letter to the EITI Secretariat indicating the Republic of assume the governorship of the Indonesian Central bank. Indonesia’s intention to implement EITI, the path forward will • As one of his last acts in office, the Coordinating Minister for still be long, but is now clearer and more certain. the Economy issued and the president signed an Instruction Special attention will need to be given to the formation of a which directed, among many other things, that by June multi-stakeholder Steering Group (SG). A challenge will be to 2009 the Minister of Finance and the Minister for Energy and ensure that all stakeholders are represented at the table in the Mineral Resources would formulate a joint decree for SG, and equally able to partake in decision-making processes “enhancing transparency in oil, gas and mining and to support EITI implementation. The foundation for this is management.” quite solidly in place due to the interaction among all July, 2008: stakeholders in the last two years. looking even further to the • The Coordinating Ministry for Economic Affairs called future, the real benefits to Indonesia from the EITI will be in together 33 representatives of oil, gas and mining three areas: (i) trust-building and economic growth, (ii) fiscal companies to ask their views on the EITI. Representatives of stability, and (iii) improved government accountability and large mining firms were uniformly supportive in their public corruption prevention. ADVANCINGTHE EITI INTHE MINING SECTOR Trust-building and economic growth: When the EITI gets Minister of Energy and Mineral Resources would serve as the underway in Indonesia, it will serve as a forum in which trust Champion for the EITI; and second, when assurances were made will be built between government and industry, and even that the former Coordinating Minister for the Economy would between different levels of government. With increased trust, do the same. Neither assurance was realised. patience was many of the thorny issues pertaining to the payment, collection required, and ultimately rewarded, when the government finally and redistribution of oil, gas and mining revenues will be did join the EITI. addressed in a more efficient and less confrontational manner. A third lesson is that facilitating discussions with government, To the extent that some of these issues can be resolved, the industry and NGOs is not enough. What Indonesia shows is that investment climate will improve, more new investments will be in large states, especially those new to democracy, one must made, more minerals will be produced, and the economy will also cultivate the nation’s most respected, effective, independent grow. and reform-oriented figures. For example, the intervention of Fiscal stability: If the EITI is implemented in Indonesia, fiscal the presidential Adviser for the Environment was essential for stability will also improve and revenues will be enhanced. the Minister of Energy and Mineral Resources, and later the Currently, the way in which extractive industry revenue streams Coordinating Minister for the Environment, to agree to support are managed lacks clarity. The physical sharing of oil by the Initiative. The conversation of the reformist former Finance producers with government is one case in point. This revenue Minister of Nigeria with the current Minister of Finance of stream fell from uS$13.9 billion in 2006 to only uS$10.4 billion Indonesia is said, by those who were there, to have been in 2007, in spite of the fact that international oil prices rose important. Other reform-oriented figures whose support has during that year. Although some of this fall in revenue can be proved crucial were the two former senior figures in the explained by the rising cost of recovery and declining Anti-Corruption Commission who sponsored the drafting of an production, approximately uS$1.5 billion of this loss evades EITI presidential Regulation. What all these figures have in explanation. With more transparency, it will be easier to common is the fact that they are respected enough to interact understand which parties are responsible for unduly precipitous on a semi-regular basis with ministers, and are reformist enough declines in some oil, gas and mineral revenues, and hopefully in their orientation to be willing to expend personal political this trend can be mitigated. capital to try to persuade ministers to support the EITI. Improved accountability: From the civil society perspective, the A fourth lesson is that it would be easier to convince large EITI will provide a forum for dialogue to continuously improve states like Indonesia to join the EITI if there were some the governance of the extractive industries, and, especially in developed nations that were also EITI Candidates. With the the mining sector, provide citizens with a clearer picture of exception of the most broad-minded, Indonesians tend, to revenue flows into the coffers of the government and enable varying degrees, to be resentful of the fact that only developing citizens to ask for accountability in the delivery of public and emerging states belong to the EITI, and not developed services and facilities. Civil society is also optimistic that, by nations. The fact that no developed Western nation (except joining the EITI, Indonesia will be able to begin addressing and Norway) is currently classified by the IMF as being preventing corruption in the country’s oil and gas and mining extractives-rich is not a satisfactory answer for Indonesians, and sectors. nor is the notion that developed states already have alternative mechanisms of transparency in place. lessons from Indonesia A final lesson is that mining firms may be a more reliable A number of lessons can be drawn from Indonesia’s experience partner in the lead up to endorsement than oil and gas firms. In in considering the EITI. Indonesia, mining firms have been willing to push harder for EITI A first lesson is that it takes a long time for a large country to adoption than oil and gas firms. The party line of oil and gas decide to join the EITI. The process of bringing discussions by companies in Indonesia, even those that support the Initiative local stakeholders to the point where a populous state decides at their headquarters levels, tends to be that they will be happy to join the Initiative will typically be very long, and requires hard to support the initiative if the government tells them to do so. and diligent work. bilateral and multilateral agencies that The support from minerals producers and the Indonesian typically finance this type of work need to understand that a Mining Association tends to be more unequivocal. Thus, while long lead-in time will be needed before their investment shows the Indonesian petroleum Association refused to send a results. representative to speak at an EITI-sponsored forum on the A second lesson is that the facilitation of discussions with extractives industries investment climate held in September large potential EITI member states requires patience and 2007 (see above), the Indonesian Mining Association willingly humility. As the chronology earlier in this chapter shows, two sent a speaker. setbacks were experienced along the road toward Indonesian Why miners in Indonesia have been more willing to engage in endorsement: first, when assurances were made that the public discourse on regulatory issues than oil and gas ADVANCINGTHE EITI INTHE MINING SECTOR companies is an interesting question. The answer may lie in the fact that mining contracts were, prior to the passage of the new mining law in December 2008, more secure than oil and gas contracts. under the old system, once mining Contracts of Work were approved, they ran for 30 years. Any disagreements with government over the terms of these contracts could be settled through neutral international arbitration. Oil and gas contractors, on the other hand, although allowed to keep a percentage of what they produce, have their operations owned by the State. Moreover, in any given year, simply to stay operational, oil and gas contractors must seek dozens of individual permits from the Executive Agency for upstream Oil and Gas business Development (bpMIGAS). The fact that oil and gas firms are (or at least were) more structurally constrained than mining firms may explain why the former are less willing to engage on public discourse than the latter. looking to the future, it is of paramount importance that all Indonesian stakeholders can be brought together to make the EITI work to the maximum benefit of the nation, including its poorest citizens. David W. Brown, PhD, is the EITI Senior Adviser in Indonesia, working under an MoU between the UK’s DFID and the World Bank. Chandra Kirana is the Asia Pacific Coordinator for the Revenue Watch Institute. Notes 1 International Monetary Fund, “Guide on Resource Revenue Transparency”, June 2005: 63-64. 2 price Waterhouse Coopers, “Mine Indonesia: Review of trends in the Indonesian mining industry”, December, 2007: 32. 3 The passage of a long-awaited Mining bill on 16 December 2008 will do little to resolve most of these misunderstandings, and if anything will probably add to them, at least until its implementing regulations are enacted. 4 Report of the Extractive Industries Transparency Initiative (EITI) london Conference, 17 June 2003, http://www2.dfid.gov.uk/news/files/eitireportconference17june03.asp 5 International Monetary Fund, “Report on the Observance of Standards and Codes (ROSC)”, 2006, https://www.internationalmonetaryfund.com/external/pubs/ft/scr/cr06 330.pdf 6 Transparency International Indonesia, “Minister of Finance Supports Transparency Initiative for the Extractive Industries”, 20 June 2007, http://www.ti.or.id/news/44/tahun/2007/bulan/06/tanggal/20/id/1340 7 Mohamad Ikhsan, "Should We Renegotiate Contracts?" Tempo, 3 September 2007. 8 peter Eigen, Jakarta post, 29 November 2007. ADVANCINGTHE EITI INTHE MINING SECTOR 1 A pRIVATE SECTOR pERSpECTIVE: DEBATING ADhERENCE To ThE EITI IN zAMBIA SIxTUS C. MULENGA Introduction Following the completion of privatisation in 2000, the industry Zambia is rich in mineral resources, with copper and cobalt is private-sector driven. Since then the mining industry has being the predominant metals produced. The Copperbelt received over uS$3 billion in foreign direct investment. This province has been the main centre of mining activity in Zambia investment has funded new projects and the modernisation of where large-scale mining is over 100 years old. For several old mines. decades the country has been among the top producers of The investment has enabled the development of new mines copper and cobalt in the world. in non-traditional mining provinces of Zambia, thus fulfilling Mining has been the major industry in the country, and the the national programme of diversification within the mining engine for national economic development. Metal exports industry. Examples include the lumwana Copper Mine by constitute the main foreign exchange earnings, constituting Equinox Minerals ltd, the kansanshi Copper Mine by First around 64% of total exports. Quantum Minerals ltd in North-Western province, and the Over the years the Zambian mining industry has gone Munali Nickel Mine by Albidon Zambia ltd in Southern province. through a full cycle of ownership: privately owned from the Furthermore, major expansion projects have been early 1900s to the 1980s, nationalised throughout the 1980s undertaken on the Copperbelt province mines. These include and 1990s, and returned to private ownership from 2000. the Mufulira Smelter by Mopani Copper Mines plc, the konkola The current main large-scale mining companies are as Deep Mining project and Nchanga Copper Smelter by konkola follows: Copper Mines plc, and the Chambishi Copper Smelter by NFC. • konkola Copper Mines plc – Vedanta Resources plc It has been clearly demonstrated that Zambia has been • Mopani Copper Mines plc – Glencore International AG and able to attract foreign direct investment because of its First Quantum Minerals ltd investor-friendly policies, strong legal and fiscal regulatory • kansanshi Mines plc – First Quantum Minerals ltd frameworks and political stability. • First Quantum Minerals and Operations ltd – First Quantum It is against this setting that the Zambia Chamber of Mines Minerals ltd has emerged as a key player in the development of the mining • Chibuluma Mines plc – Metorex plc industry. The idea of implementing the EITI in Zambia has been • luanshya Copper Mines plc – J & W promoted by the Chamber of Mines. • Chambishi Metals plc – J & W • NFC Africa Mining plc – China Non-Ferrous The importance of the EITI to Zambia • lumwana Mining ltd – Equinox Minerals ltd Implementing the EITI in Zambia will enhance stakeholders’ • Albidon Zambia ltd – Albidon ltd. understanding of the mining industry and benefit the development of the sector in several ways. It will: 0 ADVANCINGTHE EITI INTHE MINING SECTOR • enhance broader transparency in licensing, monitoring and companies and civil society groups) attitudes towards sharing the benefits of the mining sector; governance of the mining sector in Zambia, and • promote good governance in managing mineral resources; • to provide practical guidance to government on how to • create better awareness by the citizenry of the mining implement the EITI programme in the case that the industry’s contribution to national economic development; government decided to commit to the EITI. • promote a good image of both government and the mining The consultative process was all-inclusive, and interviews were industry; conducted with a wide range of stakeholders within • make it difficult for corruption to take root in the industry; government, civil society, mining companies and development • consolidate the public–private partnership approach as a agencies. good model for sustainable national economic development; Findings of the scoping study • enhance the country’s international standing as a good The main findings of the scoping study were: destination for foreign direct investment; and • that there was a broad consensus by stakeholders in Zambia • promote the growth of the mining industry. that an EITI programme would be both possible and beneficial; and Road map of implementing EITI • there would be a need for the multi-stakeholder group – background civil society, government, and mining companies – to The Zambian government plays a regulatory role in the mining participate in the implementation process. industry. The legislative framework promotes good corporate governance, environmental stewardship and best practices in Multi-stakeholder consensus-building workshop occupational health and safety. Tax arrangements are covered In July 2008, the Zambian government in collaboration with the under an investor-friendly fiscal regime. World bank Group, the EITI International Secretariat and other The mining companies enjoy good relations with government, cooperating partners, held a multi-stakeholder as exemplified by the promotion of public–private partnership, consensus-building workshop in lusaka. characterised by a dialogic approach to issues of common The key outcomes included the following: interest. • government, the Chamber of Mines, civil society and Mining companies have invested heavily in Corporate Social members of parliament unanimously resolved to adopt the Responsibility (CSR), in addition to contributing to government EITI; revenue through taxes. CSR activities include education, health, • government issued an statement of its intention and local business development, and sports and community commitment to sign up for the EITI; development. However, despite this massive investment, there • consensus on the composition of the tripartite Zambia EITI is a notable lack of appreciation by some stakeholders of the Council. The Council would comprise an equal number of mining industry’s contribution to the national economy. representatives from government, mining companies and It is against this background that the Chamber of Mines civil society; initiated the idea of adopting the EITI as a framework to further • adoption of the Secretary to the Treasury as the EITI enhance better understanding by all Zambian stakeholders Champion; of the mining industry’s contribution to national economic • the Ministry of Mines and Minerals Development would development, and to build trust between civil society groups, host the EITI Secretariat; the government, and mining companies, through greater • the EITI Draft Charter was adopted and would be reviewed transparency and accountability. and approved by the Zambia EITI Council; and • the Draft Work plan was adopted for further review and Implementation process approval by the Zambia EITI Council. Scoping study In April 2007, the government of the Republic of Zambia (GRZ) Way forward – main strategic directions wrote to the World bank requesting support to carry out a The Draft Work plan is to be approved and published by the scoping study on the EITI. The purpose of the study was to assist Zambia EITI Council; the GRZ in identifying the potential benefits of implementing • The application to sign up for country candidacy is to be the EITI and deciding whether or not to implement the initiative. submitted to the EITI International Secretariat, following the The scoping study was funded by the EITI Multi-Donor Trust completion of the process by the Zambia EITI Council; Fund administered by the World bank, and had two main • undertake an EITI Outreach Campaign to raise public objectives: awareness of the initiative; • to assess stakeholder (government agencies, mining • Once the country becomes a Candidate Country, the Zambia ADVANCINGTHE EITI INTHE MINING SECTOR 1 EITI Council will proceed with EITI implementation, resulting in the publication of the first EITI Report; and • The Validation process will follow thereafter, to enable Zambia achieve EITI Compliant status. key lessons The main lesson learned has been that the involvement of all key stakeholders in the EITI process, from the conceptual stage to implementation, increases acceptance, support and the potential for the success of the programme. The stakeholders identified the following elements as the main reasons for their strong support for implementation of the EITI in Zambia: • the public–private partnership approach is an excellent model to employ in implementing EITI; • the engagement of political leadership to lead the process ensures government commitment and leadership to drive the process to fruition; and • the EITI framework is generic, and as such each country can implement the Initiative in a way that allows for each country's unique national circumstances to be taken into account. Public–Private Partnership in implementing EITI The government Civil society Mining companies Zambia EITI Council National EITI Secretariat (to manage day-to-day EITI work) Dr Sixtus C. Mulenga is the General Manager of Corporate Affairs at Albidon zambia Ltd, Council Member of the zambia Chamber of Mines, Member of the zambia Extractive Industry Transparency Initiative Council and World Bank Group Extractive Industry Advisory Group. 2 ADVANCINGTHE EITI INTHE MINING SECTOR 1 REVENuE REpORTING pRACTICES IN AuSTRAlIAN ExTRACTIVE SECTOR LAURA MISSINGhAM, LUKE BEWLEY and ERICA FERGUSoN Introduction Australian Government and State Revenue powers Australia is a mineral resource-rich state long established in the One of the challenges accompanying Australia’s federation was extraction and export of these commodities. Consequently, the creation of a two-tier system of government that centralised Australia has considerable expertise that can be applied to control of some functions while allowing each State-sufficient resource management and transparency promotion for autonomy to meet the social preferences of its constituency. development outcomes in partner countries. Australia’s The Australian constitution specifically enumerates areas of expertise in these areas has been promoted globally with the legislative power to the Australian (national) government, success of major Australian mining corporations. The overseas leaving the majority of expenditure responsibilities to the approaches of companies in terms of their efforts to promote States as residual powers. development have also in part been influenced by their Australia has a complex array of tax and non-tax Australian domestic experience. revenue-raising instruments that it applies to the mining The mining sector is a major contributor to the Australian industry. Different resource taxes, royalties and payment economy. The Australian bureau of Agricultural and Resource arrangements are imposed across different resources, and on the Economics has forecast that in 2008-09, earnings from same type of resource depending on its location. Further, mineral Australian energy and mineral exports will be worth more than resources are subject to different royalty arrangements across AuS$150 billion. key mineral exports for Australia in 2008-09 the States, including ad valorem royalties, specific royalties, profit include thermal coal, metallurgical coal, iron ore, alumina and royalties, or a combination of these types of royalties. uranium.1 Each revenue collection method (and those used in other The importance of extractive industries to Australian State countries) can result in different effective tax or revenue and Federal revenue has led to the development of strong and outcomes, depending on the resource’s price and the rate of effective regulation (including extraterritorial) and revenue return to the private sector. It should be noted that the management systems over the past 100 years. An outline of Australian Government generally imposes its taxes in offshore best practice approaches to extractives revenue collection and areas (i.e. waters administered by the national government), management follows, including the work of State and Federal whereas state governments impose their royalty charges on government departments with particular expertise in the shore. There are, however, exceptions to this where there are minerals sector. revenue-sharing arrangements between the Australian Government and the Western Australian (WA) State Government. ADVANCINGTHE EITI INTHE MINING SECTOR 3 Australian Government Corporate Taxation and Mining interaction of company income tax with the taxation of resident Royalty and non-resident shareholders. Expenditure of government revenue and accountability The calculation of taxable income for companies is generally measures the same as for individuals, but with some significant Company tax is administered and collected by the Australian exceptions. These exceptions include that companies do not Taxation Office, an administrative arm of the Australian benefit from any discount on their net capital gains and that Government, and Commonwealth royalty is jointly administered companies alone receive research and development tax and collected by the Department of Resources, Energy and concessions, among other tax concessions. Further, most Tourism and the WA State Government. Each of these revenue income from direct offshore investment by an Australian items is paid into a Consolidated Revenue Fund and then resident company is exempt from company income tax, appropriated for any number of Australian Government regardless of whether it is retained off shore, paid as a dividend expenditure commitments. to the company, or realised as a capital gain. Estimated revenue for each item is reported in the Annual budget papers, and actual revenue reported in the Final budget Mining taxation, royalty and excise Outcome. legislation giving effect to each of the items is as The Australian Government and state governments generally follows: company tax – Income Tax Assessment Act 1997 and own, on behalf of the Australian community, mineral and Income Tax Assessment Act 1936; pRRT – Petroleum Resource Rent petroleum resources in Australia and impose charges on mineral Tax Assessment Act 1987; Commonwealth royalty – Offshore extraction and petroleum production to ensure that the Petroleum Act 2006; and crude oil excise – Excise Tariff Act 1921. Australian community receives a benefit from their This legislation is freely available through the Australian development. The Australian Government receives mining, Government’s Australian law website, taxation, royalty, and excise revenue. http://www.comlaw.gov.au/. The Australian Government allocates the expenditure of Corporate disclosure consolidated revenue through Appropriation bills as part of under the Corporations Act 2001, companies listed on the the Australian Government’s annual budget. Australian Australian Securities Exchange must keep financial records and Government agencies are accountable under the Financial prepare financial reports. listed companies are required to Management Accountability Act 1997, which sets out the prepare half-year as well as annual financial reports, which must financial management, accountability and audit obligations of be independently audited and include an auditor's report. Australian Government agencies, in particular for managing Additionally, listed companies must prepare an annual report and public resources efficiently, effectively and ethically, and for lodge it with the Australian Securities and Investment maintaining proper accounts and records of the receipt and Commission (ASIC). ASIC is tasked with upholding the law under expenditure of public money. the Corporations Act 2001, in addition to promoting confident All Australian Government agencies are required to comply and informed participation by investors and consumers in the fully with internationally accepted accounting standards and are financial system. Finally, the Australian Accounting Standards subject to audit by the Australian National Audit Office. board issues Australian versions of International Accounting Standards board standards, which have the force of company law Company taxation for listed companies' prepared financial statements under the law. Company taxation is tax payable by companies and paid on a quarterly basis to the Australian Taxation Office. Company State Mining Royalties income tax is levied at a rate of 30% of the taxable income Introduction of Australian companies, including incorporated and Each State and Territory in Australia has in place its own royalty unincorporated associations, limited partnerships, and some arrangements applying to mining tenements within its corporate unit trusts and public trading trusts. respective jurisdiction, and is governed by legislation and Company income tax has two basic roles: i) as a withholding regulations as they apply to each jurisdiction. As most tax on income earned by Australian residents through shares in jurisdictions adopt production-based royalty regimes (rather a resident (Australian) company; and ii) as a final tax on than profit-based), the State of Western Australia (WA) will be (generally Australian-source) income earned by non-residents used to illustrate how a State or Territory jurisdiction applies its through shares in an Australian company or a non-resident royalty arrangements, with some reference to other jurisdictions company’s branch in Australia. The design of Australia’s where appropriate. It should be noted that there are a number of company income tax system has historically taken account of differences between jurisdictions with regard to allowable both these roles. This has influenced decisions about the deductions for mining tenement holders, for royalty calculation company income tax rate, base, and other rules, and the purposes. ADVANCINGTHE EITI INTHE MINING SECTOR Expenditure of Government revenue and accountability packaging materials used in transporting the mineral, in the measures form in which it is first sold. Generally, State and Territory royalty revenue is not used for the purposes of carrying out the activities of a jurisdiction’s mining Corporate disclosure Department, or to contribute to any specific mineral-based The Mining Act 1978 (WA) requires mining tenement holders to activity. Rather, royalty revenue forms part of each jurisdiction’s keep records so that royalty details can be verified at their consolidated revenue and is distributed as part of each offices. This includes records on production, revenue, and cost jurisdiction’s annual budgetary process. However, there is at documentation. Officers from the WA State Government have least one exception: the South Australian Government the authority to enter projects/offices of project holders to verify contributes a portion of the royalties collected to the Extractive documentation. Tenement holders are required to lodge Areas Rehabilitation Fund. This Fund is designed to facilitate periodic production reports showing volumes produced and environmental rehabilitation of extractive mineral leases. estimated value. The Mining Act 1978 (WA) also requires the payment of royalty Western Australia royalty arrangements as a condition of the lease, sets out royalty rates and systems WA’s primary legislation governing mining is the Mining Act that apply to minerals or petroleum, including the requirements 1978 (WA), which states that royalties are payable on all for lodging royalties (i.e. royalty reports and royalty payments), minerals. A mineral is defined as a naturally occurring and sets a fair market price if transfer pricing occurs or the sale is substance, including evaporites, limestone, rock, gravel, sand not at arm’s length. If royalty is unpaid or the calculation of and clay. The definition of“mineral”excludes the following royalty is not correct, a process is undertaken to estimate or where they occur on private land: correct any royalty calculation errors. penalties apply for unpaid • limestone, rock or gravel shale, other than oil shale; or late royalty payments. • sand, other than mineral sands, silica sand or garnet sand; project holders are monitored to ensure that production and and royalty reports are received. When production and royalty • clay, other than kaolin, bentonite, attapulgite, or reports are received they are checked by the WA State montmorillonite. Government; these checks include mining tenement site visits private landholders may extract these resources and sell them to verify the information reported by projects in the reports. Any without paying a royalty to government. They may also allow adjustments to royalty that may be required due to errors found others to extract the resources and obtain a type of royalty during the verification process are made in the next royalty payment. The specific petroleum royalty applied by WA is based period. on the wellhead system for minerals – a production based ad Within 30 days after the expiry of the first quarter during valorem royalty (rather than the profit-based pRRT). An ad which any mineral is produced or obtained from a mining valorem or value-based royalty is calculated as a proportion of tenement, the mining tenement holder shall, unless the Director the“royalty value”of the mineral. The royalty value is defined by General of Mines (WA) in a particular case otherwise approves, the Government of Western Australia Department of Mines and furnish the Director General of Mines with a quarterly petroleum as:“in relation to a mineral other than gold, means production report and continue to furnish the Director General the gross invoice value of the mineral less any allowable of Mines with a quarterly production reports within 30 days deductions for the mineral”.both the“gross invoice value”and after the expiry of each subsequent quarter (whether or not any “allowable deductions”are defined in the Mining Regulations mineral is produced or obtained from that mining tenement or 1981(WA) as follows: land in that quarter). • Gross invoice value: in relation to a mineral, means the The mining tenement holder is required to submit a royalty amount, in Australian currency, obtained by multiplying the return with each royalty payment 30 days after each quarter. quantity of the mineral, in the form in which it is first sold, The return must be in an approved form, showing where for which payment is to be made (as set in invoices relating relevant: the quantity of the mineral; details of any sale, transfer, to the sale) by the price for the mineral in that form (as set shipment or disposal of the mineral; the royalty value of the out in those invoices). mineral; the gross invoice value of the mineral, when it was • Allowable deductions: in relation to a mineral, means the paid, and any allowable deductions for the mineral; and the rate amount, in Australian currency, of any costs in transporting of royalty used. the mineral, in the form in which it is first sold, incurred after The WA State Government performs desk audits of all royalty the shipment date by the person liable to pay the royalty for returns received as follows: the mineral; and if the mineral is not exported from • ensuring all royalty returns are checked for computational Australia, the price, in Australian currency, paid or to be paid accuracy and that the applied royalty and any deductions by the person liable to pay the royalty for the mineral, for are in accordance with the Mining Regulations and any other ADVANCINGTHE EITI INTHE MINING SECTOR applicable legislation under which returns are provided; publicly information on their resources production and reserves • verifying any supporting documentation, such as invoices not yet developed. and other documentation that is provided with the royalty return to ensure that all the relevant receipts and JORC Code deductions are reasonable and the correct royalty Following an Australian mining stock crash in 1969-70 that was has been paid; brought about by extraordinary and excessive speculation on • ensuring any adjustment arising out of desk audits is nickel prices, considerable concern arose regarding discussed and agreed with the royalty payer and is included unacceptable resource-reporting practices. Responding to the in the next royalty return; resulting challenge and opportunity to self-regulate, the • maintaining an audit plan and endeavouring to carry out all Australian Mining Industry Council (now the Minerals Council of audits in accordance with the plan; and Australia), established a committee to examine the issue. It was • WA State Government officials preparing an audit report joined by the Australasian Institute of Mining and Metallurgy. within 14 working days of the audit. These two organisations formed the Australasian Joint Ore Audits are also carried out at the company offices of mining Reserves Committee (JORC). Other organisations are now tenement holders. The WA State Government ensures that all represented, including the Australian Institute of Geoscientists, royalty payers are visited for audits at the company office where the Australian Stock Exchange and the Financial Services royalty records are maintained, with the following frequency: Institute of Australasia. Subsequently, JORC was established as a • major royalty payers, that is where the royalties received permanent committee, and has been in existence since 1971. amount to more than $2100,000 per year, are visited at least between 1972 and 1989, a number of reports were issued by once per financial year; JORC that made recommendations on public reporting and Ore • medium royalty payers, that is where the royalties received Reserve classification. These recommendations formed the basis amount to between $30,000 to $100,000 per year, are for the principles now incorporated in the JORC Code. The visited at least once every two years; and original recommendations only had the status of guidelines, but • for minor royalty payers, that is where the royalties received over time were gradually adopted by most Australasian mining are under $30,000 per year, the WA State Government will and exploration companies. endeavour to visit these payers once every three years. The purpose of the JORC Code is to provide a minimum The WA State Government maintains an audit plan and standard for the reporting of Exploration Results, Mineral endeavours to carry out all audits in accordance with this plan. Resources and Ore Reserves in Australasia, and to ensure that This includes verifying supporting documentation, such as public reports on these matters contain all the information invoices and copies of cost invoices and other documentation, which investors and their advisers would reasonably require for to ensure that all relevant receipts have been provided, the purpose of making a balanced judgement regarding the deductions are reasonable, and the correct royalty has been results and estimates being reported. In part, the JORC achieves paid. An audit report is then prepared within 14 working days of these aims by: the audit. • establishing and prescribing the minimum standards for During the royalty assessment and audit process, the WA public reporting of Exploration Results, Mineral Resources State Government ensures that all receipts are at an and Ore Reserves in Australasia; and arm’s-length price and represent a fair market value, and • setting out a system for the classification of tonnage (or maintains and monitors all major traded commodity prices to volume) and grade (or quality) estimates as either Mineral ensure that royalty values reflected in the royalty returns are Resources or Ore Reserves, and for the subdivision of each reasonable. into categories which reflect different levels of certainty or The holder of a mining tenement must keep all records that confidence. are necessary to give a true and complete indication of the The principles of the JORC Code are summarised in Clause 4 of quantity of the mineral and any sale, transfer, shipment or the 1999 Code as“Transparency, Materiality and Competence”: disposal of the mineral, including time, destination, value and • “Transparency”requires that a public report contains quantity of each sale, transfer, shipment, or other disposal. All sufficient information, the presentation of which is clear and records must be kept for a period of seven years. unambiguous, so that a reader is able to understand the report and is not misled. Extractive Industry transparency through • “Materiality”requires that a public report contain all the resources-reporting relevant information which a reader could reasonably be A further way Australia promotes transparency in extractive expected to need in order to make a balanced judgement industries is through placing requirements on resources about the matters being reported. companies listed on the Australian Securities Exchange to report • “Competence”requires that the public report be based on ADVANCINGTHE EITI INTHE MINING SECTOR work which is the responsibility of a suitably qualified and work that reinforces the aims of the extractives revenue experienced person who is subject to an enforceable transparency that Australia contributes to. These include professional code of ethics; that is, that public reports are activities that support extractive industries’social responsibility based on work undertaken or supervised by a Competent and environmental sustainable development. For example, the person. Australian Government is committed to a range of existing The Australian Securities Exchange and the New Zealand Stock partnerships and international instruments that help to address Exchange have, since 1989 and 1992 respectively, incorporated weaknesses within the extractives management value chain, the Code into their listing rules. under these listing rules, a including: public Report must be prepared in accordance with the Code if • supporting good corporate behaviour including in the it includes a statement on Exploration Results, Mineral extractives sector through support for the Extractive Resources, or Ore Reserves. Industries Transparency Initiative; Reasons for the success of the JORC Code in Australasia include: • promoting and implementing the OECD Guidelines for • the regulatory backing; Multinational Enterprises (voluntary principles and • the intentional avoidance of over-prescriptive definitions standards for responsible business conduct); and and operational requirements; • adhering to the united Nations Convention Against • industry’s ability and willingness to discipline Competent Corruption and the Foreign bribery Convention. persons; • the origins of the Code; lessons learnt from the Australian regulatory • the nature and composition of the Joint Ore Reserves experience committee; and The Australian Ministerial Council of Mineral and petroleum • JORC’s commitment to communication and to ongoing Resources has endorsed the following principles for resource tax revision of the Code. regimes in Australia. These are, to the greatest extent practical, Similar codes, guidelines and standards have subsequently been that resource tax regimes should compensate the community adopted by the relevant professional bodies in Canada, South for allowing the private extraction of Australia’s non-renewable Africa, the uS, the uk, Ireland and in a number of European resources while seeking to ensure: countries. • economic efficiency (not distorting commercial decisions regarding the levels of capital and other inputs devoted to Transparency for companies not listed on the Australian economic activities which should be made in response to Securities Exchange that have deposits and/or mines in market signals); Australia • equity (relating to the resource developer’s capacity to pay; The ability of governments, analysts and investors in Australia to fairly sharing the burden and benefits of revenue collection access mineral resource data and trends, and accurately forecast between the resource developer and the community; being production and export volumes and values, has in recent years uniform across all taxpayers in equal situations and being become inhibited by the rapid increase in the number and competitively neutral across competing resources); resource holdings of foreign-listed, private, and private equity • administrative simplicity (minimising compliance and companies operating in the Australian minerals sector. This is administration costs for business and government); because only companies listed on the Australian Securities • consistency with broader environmental, social and fiscal Exchange are required to report under the JORC Code. objectives (taking account of the need for reliability and Recognising the need to ensure the availability of resource predictability of revenues, being mindful of externalities information received from all companies that own mines such as environmental, social or infrastructure objectives); and/or significant mineral deposits in Australia, regardless of and whether or not the companies are Australian Securities • international competitiveness (the tax regimes do not harm Exchange-listed, the Australian Government has established the competitiveness of Australian resource producers an intergovernmental committee to review the issue. relative to overseas suppliers, and do not act as an incentive It is anticipated that this committee will develop a set of to invest in overseas resource projects in preference to recommendations to address the issue for the consideration competing Australian resource projects). of the Australian, State, and Territory Governments in 2009. principles similar to these may be usefully adapted to suit the particular circumstances of developing countries. Other support The Australian Government prioritises good mining practice and The EITI is committed to ensuring that Australian companies abide by Australia is strongly committed to the Extractive Industries this in their overseas operations. There is a range of support Transparency Initiative and the role it plays in increasing ADVANCINGTHE EITI INTHE MINING SECTOR demand for transparency and better governance in the oil, gas and mining industries. The Australian Government became an EITI supporting country in 2006, and, as a part of its commitment to the Initiative, is working together with other international donors and multilateral organisations to provide support for greater transparency and accountability in extractive industries. Australia has committed to the World bank administered Multi-Donor Trust Fund, and helps shape the direction of the Initiative through the EITI board, supporting country constituency and the Multi-Donor Trust Fund Management Committee. While Australia has not made a formal commitment to implement the EITI, Australia’s current domestic management of extractive resource industries already delivers many of the outcomes sought by the EITI principles and criteria. Laura Missingham and Luke Bewley work in the Resources Division at the Australian Department of Resources, Energy and Tourism. Erica Ferguson is in the Governance and Anti-corruption, Group at the Australian Agency for International Development (AusAID). Notes 1 Further information and statistics on Australia's mining industry are available at www.abare.gov.au, including in quarterly "Australian Commodities" reports. 2 Australian Dollars. All figures in this chapters are in Australian Dollars ADVANCINGTHE EITI INTHE MINING SECTOR 1 TRANSpARENCy IN DEVElOpED COuNTRIES: ThE CASE oF CANADA NATURAL RESoURCES CANADA1 background Constitutionally, Canada is a confederation, with ten provinces Canada is one of the largest mining nations in the world, and three territories. Canada has two levels of government with producing more than 60 minerals and metals (NRCan). The authority to make laws, namely, at the federal level and at the mining and mineral processing industries represented 3.4% of provincial/territorial level, and these are enshrined in the the national GDp in 2007, contributing $41.7 billion2 to the Canadian Constitution. Canadian economy (Statistics Canada). In 2007, preliminary The federal government has responsibility for such matters as estimates indicated the value of Canadian mineral production to fiscal and monetary policy, banking, criminal law, fisheries, be over $84 billion (NRCan); this figure includes the traditional interprovincial and international trade and commerce, federal value of production from Canadian mined ores, concentrates and lands, and international treaty-making. In the area of mining, the aggregates, as well as the value realised from the smelting and federal government has authority over uranium mining, mining refining of domestic and imported materials. It also includes the activities in the territories and offshore, mining on federal lands, value of primary steel and aluminium production and oil sands and fiscal policies to stimulate investment, encourage production mining. The 2007 exploration and deposit appraisal expenditures and enhance competitiveness and trade. Some of the federal totalled $2.8 billion, and revised company spending intentions responsibilities related to fisheries, protected areas and the for 2008 indicated a further increase to $3.1 billion (NRCan). In environment also apply to mining projects. 2007, total direct employment reached more than 363,000, or The provinces have authority with respect to provincial 2.2% of Canada’s total employment (Statistics Canada). About taxation, the use and management of provincial lands, the use 51,000 were employed in mining, 79,000 in primary metal and management of natural resources, property and civil rights manufacturing, and 233,000 in the mineral processing and within the province, civil law, and intra-provincial trade and fabricated metal industries (Statistics Canada). commerce. In the case of mining, provinces own and manage the Canada continues to be the world’s leader in the production resources, make land-use decisions, issue licences and permits, (by volume) of potash and uranium. It ranks in the top six conduct monitoring of activities, collect mining royalties and countries for the production of cadmium, chrysotile, cobalt, provincial taxes, and are responsible for health and safety issues. gypsum, magnesium, molybdenum, nickel, platinum group Some“provincial”responsibilities have been devolved to the metals, salt, titanium concentrate, and zinc (NRCan; uSGS). territories, but many of those relating to mining in the territories Canada ranks third in the world in the value of diamond remain federal responsibilities, due to the fact that the lands in production and continues to be the third largest producer of the territories are federal lands. primary aluminium in the world, producing 3.1 million tonnes Municipal or local governments deal with matters such as from imported ores (NRCan). zoning and the issuing of some permits within their boundaries. ADVANCINGTHE EITI INTHE MINING SECTOR Finally, there are Aboriginal governments that exercise authority many years, it is not static. It keeps up with important trends in over lands: the responsibilities of Aboriginal governments are the industry, such as globalisation, increased Aboriginal defined in specific agreements negotiated between them and participation, responses to environmental and social impacts, the federal and provincial governments. federal and provincial/territorial imperatives, and recycling. The distribution of mining activity within the Canadian However, significant changes are always implemented through a jurisdictions is not equal. In 2007, there were approximately 180 transparent consultative process which ensures that tax rules are producing establishments (metal and non-metal, including peat well known. bogs and coal mines), more than 3,000 stone quarries and sand and gravel pits, and about 50 nonferrous smelters, refineries and Federal government, taxes and levies steel mills operating in Canada. Although there are mining With respect to the mining industry, the government of Canada activities in all Canadian provinces and territories, over 80% of imposes corporate income taxes, a capital tax, the Goods and the total mineral production was accounted for by Ontario (26%), Services Tax, payroll levies such an employment insurance and Saskatchewan (14%), british Columbia (14%), Quebec (14%), and Canadian pension plan or Quebec pension plan, excise taxes and Newfoundland and labrador (12%). custom duties. Historically, the challenge within Canada was to identify an Canadian corporate income tax is based on income from effective and transparent way to collect taxes, royalties and other business, property, employment and capital gains. Generally, a revenues, while ensuring that the revenues were distributed in an corporation will be considered resident in Canada if it has been equitable manner. Once established, this fiscal regime had to be incorporated in Canada, or, having been incorporated in another fashioned over time to apply to the particularities of the mining country, if its central management is located in Canada. industry. Canadian resident corporations are taxed federally on their worldwide income regardless of their geographic source. If a Revenue collection regime Canadian resident corporation earns income from a source A revenue collection regime based on the responsibilities of the outside Canada, it will generally be entitled to a tax credit for different levels of government has been devised. This regime, some or all of the foreign tax paid. Canadian income tax imposed which recognises the payments made to the various governments, on non-resident corporations is restricted to Canadian-source ensures an effective collection of revenues. Once the revenues income. are collected, a system of equalisation payments ensures that a The federal government collects federal income tax and significant part of federal government revenue is distributed provincial personal income taxes on behalf of all provinces and equitably to provinces, thereby allowing a similar level of territories except Quebec. The federal government also collects government services across the country. The rules and the corporate income taxes levied by seven of the provinces and regulations of this regime and its application are known to by the three territories. The provinces of Alberta, Ontario and mining companies and all Canadians, in general terms. Quebec administer their own corporate income tax regimes. The Canadian tax rules applicable to the mining industry The federal government also collects the Goods and Services reflect the specific Canadian federal structure, with three Tax, a sales tax that applies to virtually all goods and services significant levels of taxation (federal, provincial/territorial, and bought and sold, payroll levies, excise taxes and custom duties. municipal) recognising the specific characteristics of mining and the historical manner in which they developed. Some of these Provincial taxes and royalties rules, such as flow-through shares to support exploration, and provincial and territorial governments impose taxes such as the tax treatment of reclamation bonds, exist only in Canada. income taxes and sales taxes. Some provinces also levy capital Mining is a highly cyclical and capital-intensive industry, with a taxes on a corporation’s capital (assets). Taxable capital generally long lead time between initial investment and commercial consists of the aggregate of a corporation’s equity and capital production. The Canadian tax regimes, both federal and indebtedness, less an allowance for its loans receivable and provincial, provide a generous treatment of exploration and certain investments. provincial capital taxes are in the process of other intangible expenses, and allow mining companies to being reduced or phased out, and are normally deductible for recover most of their initial capital investment before paying a income tax purposes. significant amount of taxes. The income tax regime also contains provinces and territories that have significant mining activities generous provisions to help mitigate the negative financial impose mining taxes and/or mining royalties and/or mineral land effects of fluctuating prices and to facilitate the reclamation of taxes on mining operations, in order to compensate the province mine sites. Finally, the provincial mining tax and royalty regimes or territory for the extraction of the non-renewable resources it are principally based on net production profits rather than on net owns. With the exception of one province, british Columbia, the smelter return royalties. mining taxes are levied on profits derived from the operation at While Canada’s mineral taxation regime has been stable for the mining stage only. 0 ADVANCINGTHE EITI INTHE MINING SECTOR provinces and territories also impose payroll levies, effective methods of collecting and disbursing funds. Furthermore, value-added taxes and excise taxes. all the reports of auditor generals are public, and invariably stimulate media and public discussion. Municipal governments Municipalities’taxation powers are limited to taxation on lessons from the Canadian case property and licences and fees. In rural and remote communities, The Canadian situation is complex, reflecting constitutional mines are usually significant contributors to municipal revenues. obligations, the functioning of a federal state, and the variety of revenues collected in a developed country. It functions well Equalisation payments because the rules and regulations are known, published and Entrenched in the Canadian Constitution, equalisation is the applied equally, and because the system is trusted, in large part federal government’s transfer programme for addressing fiscal due to its transparency, the checks and balances offered by disparities between the provinces. Equalisation payments enable auditor generals, and access to the courts. Furthermore, the less prosperous provincial governments to provide, at comparable governments have the capacity to apply the rules and ensure levels of taxation, their residents with services comparable to that the institutions function effectively. those in other provinces. laws and regulations are implemented in an open, transparent Equalisation payments are unconditional, in that the receiving and consistent manner by a professional, non-partisan public provinces are free to spend the funds according to their own service, providing continuity during changes of government. priorities. Equalisation entitlements are determined by measuring There are limited opportunities for use of discretion by officials, the province’s fiscal capacity, namely, their ability to raise since the laws and regulations are specific as to their applications. revenues. A province’s equalisation entitlement is thus equal to An independent judiciary allows governments, companies and the difference between its fiscal capacity and the average fiscal individuals an effective mechanism to seek redress in the courts. capacity of all provinces. provinces whose fiscal capacity is above Aspects of the Canadian tax regime recognise the particular the average do not receive equalisation payments. characteristics of mining and apply directly to that industry. Canada has chosen to use rules of general or sector-specific Availability of information application, rather than rules that are project-specific. The revenue collection regime of taxes, royalties, and levies is The redistribution of revenues through equalisation makes it well known and transparent. Furthermore, information on the possible for all Canadians to have access to comparable levels of amount of revenues and on the budgets is also transparent. The services while paying comparable levels of taxes. Equalisation is a budgets, the reports to parliament and departmental estimates, distinctive aspect of the Canadian federation and the distribution at all levels of government are public documents available to all. of responsibilities between the various levels of government. Information on taxes, levies and equalisation payments is Furthermore, equalisation payments are enshrined in the available publicly through a variety of instruments. Some of the Canadian Constitution, making them a powerful tool to ensure information is found on governmental websites, in the budgets an equitable distribution of revenues collected by the various of the various jurisdictions, and in reports on public accounts. In jurisdictions. the case of british Columbia, for example, the Ministry of Revenue Information on the tax regime, amounts of revenues collected, and Small business publishes information on the mineral tax equalisation payments and budgets is publicly available. The tax collected on their website, and information on taxes is available regime is transparent, with all pertinent information available in in the Financial and Taxation Statistics for Enterprises, from the public domain. Within Canada, parliamentary oversight, Statistics Canada. public information is available on the collection supported by an active media, is an effective mechanism to of the taxes, levies, royalties and duties, amounts collected, the ensure that governments are accountable for their revenues and calculation of equalisation payments, the amount of such expenditures. payments, and the budgets of the various jurisdictions. These budgets indicate government priorities, revenue projections, and Dr Lise-Aurore Lapalme is a Senior Policy Advisor working on expenditures on programmes and transfers. environmental, social and corporate social responsibility issues with the All the federal and provincial governments also have legislated Minerals and Metals Sector of Natural Resources Canada. offices of auditor generals that are independent and reliable sources of objective and fact-based information on revenues and Notes disbursements. The role of auditor generals is to hold the 1 This chapter was produced by Natural Resources Canada. It was written government accountable for the stewardship of public funds. The by lise-Aurore lapalme, Senior policy Advisor working on auditor generals, which report to parliaments, are effective environmental, social and corporate social responsibility issues with the because they highlight both the positive and negative aspects of Minerals and Metals Sector of Natural Resources Canada. the stewardship of public funds, and because they suggest more 2 Canadian dollars. $ refers to Canadian dollars throughout this chapter. ADVANCINGTHE EITI INTHE MINING SECTOR 1 1 pRACTICAl IMplEMENTATION CHAllENGES FOR MINING COMpANIES INTERNATIoNAL CoUNCIL oN MINING AND METALS (ICMM)1 Introduction viewed with some suspicion. The companies making up a This chapter complements the EITI’s current general business country’s industry might span the full range from international Guide by providing specific guidance for mining companies. majors to small-scale operators, or a country could be It has two goals: characterised by only a few, similar companies. Similarly, 1 to explore the case for companies to endorse and adopt the government involvement may vary from being primarily EITI, aimed at companies’head-offices where policy regulated centrally, to involving all levels – national, provincial decisions are taken; and and local. 2 to address key questions and implementation issues for Thirdly, the EITI is context-specific. While the EITI framework companies’in-country managers. and criteria are globally applicable, the implementation process Readers should also refer to the current EITI business Guide for unfolds very differently around the world. Each country has its additional information. own distinct political and historical context, with diverse Three important factors will influence how this guidance can perspectives on the mining sector. be applied in practice. The first is that companies have varying For all these reasons it is not possible to offer prescriptive levels of experience, capacity and motivation to support the guidance that can anticipate how the EITI process will evolve in EITI. Mining companies may legitimately want to take different all countries. Thus, the following sections address the key and approaches to their engagement in EITI implementation. Some more generic questions, and the reporting templates provided companies may wish to play a catalytic and/or an advocacy role, in Appendix 1 are intended for illustrative purposes only. for example by ensuring that there is strong representation from across the sector and from civil society. Others may wish to be Head Office considerations engaged as active participants in the EITI process. Others, still, Is there a business case for the EITI? may wish to have a minimal role in the EITI process or none at There is substantive literature about the linkages between the all. For, while all ICMM member companies are supporters of the quality of governance and the prospects for resource-endowed EITI, different companies may legitimately choose to adopt countries’economic development.2 It is generally accepted that alternative approaches to EITI implementation in a given development outcomes are enhanced by stronger economic country, or individual companies’approaches may vary between and legal institutions, and the EITI is often seen as a component countries for the reasons given below. of governance-strengthening, offering particular value as a The second factor is the diversity of the sector internationally. means of initiating broader reform. In some countries mining might be a well-established and The above statement is a generalisation, but mining well-understood industry, while in others it might be new, and investment is likely to have positive effects when public 2 ADVANCINGTHE EITI INTHE MINING SECTOR revenues are spent in a coordinated and transparent way and on The EITI is an official international process endorsed by both clearly defined national development priorities. This would “host”country (where mining occurs) and“home”country contrast with situations where government authorities are (where the head office of companies are located) governments. poorly coordinated, development goals are diffuse, money is A number of multilateral organisations, including the uN lost through corruption, and spending is focused on General Assembly, the World bank and the IMF, have all consumption. endorsed the EITI, and some are active participants in its In situations where mining investment does not contribute to implementation. reasonable development outcomes, community and political While the two processes are distinct, they are complementary. support for the industry will generally be weak. This can result in In a practical sense, the EITI can be seen as the best means for a range of adverse business outcomes: greater risks of onerous companies and governments to implement the goals of pWyp. taxation, reduced security of mining titles, and increased Thus, companies that take part in the EITI process can prospects of disrupted operations. As was explained in Chapter reasonably expect greater support from civil society and other 4, there is a strong case for industry–government–civil society key stakeholders. collaboration in the mining sector, and the EITI is a valuable vehicle for achieving this. Requirements for companies based in supporting The case for mining companies to support the EITI is clear: countries better governance standards support development efforts and Some home country governments, like the uk, Norway, improve the business environment for mining investment. Australia and Canada, have formally endorsed the EITI. These Simply put, business support for the EITI could be viewed as governments provide financial and other resources to help enlightened self-interest. advance the Initiative. However, home government endorsement does not place obligations on those countries’ The EITI and Publish What You Pay mining companies, though some companies have chosen to The EITI developed from a broad international civil society add their support to the EITI. campaign known as publish What you pay (pWyp). pWyp Some companies have made a public commitment to the EITI, has a wider scope than the EITI, seeking both disclosures of even where their home country has not formally endorsed the companies’payments to governments and government receipts EITI. An example is AngloGold Ashanti, whose public policy is as from companies, as well as promoting greater transparency in follows: export credit agencies, stock market listing requirements, and “AngloGold Ashanti has been an active supporter of the Initiative accounting standards. It is a civil society campaign that does since its inception, both via the company’s membership of the not have the formal engagement of governments and ICMM and individual corporate action. During 2006, AngloGold multi-lateral agencies but is endorsed by some companies, Ashanti formally became an organisational supporter of the EITI. including both AngloGold Ashanti and Newmont (see box 1). As a matter of principle AngloGold Ashanti has established In some cases this corporate support for pWyp has practice of disclosing all payments made to governments via our diminished initial resistance and encouraged host governments annual Report to Society, regardless of whether the country is a to improve transparency in fiscal reporting. formal supporter of the EITI. Furthermore, in countries where governments have indicated a Box 1. Newmont’s publication of tax payments and royalties desire to be a part of the process, AngloGold Ashanti is actively prior to 2003, in Indonesia, Newmont had been publishing its payments involved in contributing to the success of the Initiative. These to government through press releases in the local media. This was largely countries include Ghana, Guinea, Mali and the Democratic driven by a perception in the local community that the company was not paying its royalties and taxes. The company continues to put out regular Republic of the Congo.” media releases stating what it has paid to the government. public notification of tax and royalty payments to the government using media Is there a case for early participation by companies? releases, community newsletters or website are also regular practice by Newmont in peru and bolivia. Implementation of the EITI by governments is a substantial The practice of issuing media releases stating taxes and royalty payments exercise that requires significant time and resources. There are to the government was adopted in Ghana when Newmont’s Ahafo mine two key stages: becoming a Candidate Country, where a formal started operating in 2006. In Ghana, media releases are put out by the company on a quarterly basis. decision to adopt and begin implementing the Initiative is Why does Newmont choose to publish payments to governments? Aside made; and a Compliant Country stage, where a country has from giving the company an opportunity to explain that it is doing the completed the EITI Validation process to verify that all EITI right thing, it also provides an opportunity to support and encourage citizens to exercise their democratic rights and question their principles and practises are in place. To date there are a 24 government’s use of these taxes and royalties. Candidate Countries, but no country has completed Validation Source: Newmont Presentation to US Congressional Human Rights to attain Compliant Country status. Caucus – 2 May, 200 One implication of this is that, presently, the EITI imposes very ADVANCINGTHE EITI INTHE MINING SECTOR 3 modest administrative demands on companies – mainly only Assisting EITI establishment participation in multi-stakeholder groups to help develop A company’s motivation, capacity and ability to engage in the procedures. For this and other reasons, there are potential EITI implementation process will vary according to the specific benefits from early corporate participation. It facilitates the circumstances. Typically, companies can help EITI establishment of collaborative relations with key stakeholders implementation in four ways, namely: in-country, resulting in greater understanding and trust. For 1 participating in groups to establish the EITI, particularly the example, in relation to Azerbaijan, prof. Aronsen noted that formally required multi-stakeholder group; “even in authoritarian regimes (like Azerbaijan), the EITI seems 2 advising on the country’s work plan – for example, the to facilitate creation of a feedback loop between business, practicality of reporting procedures and payments that citizens, and their government, which can gradually spill over should be included. Companies can also ensure that, if any into the polity as a whole”.A second benefit is that providing changes are made to the EITI reporting templates, the advice input to the design of procedures means they are more likely to is issued well in advance so that the companies can modify be practical and user-friendly. In addition, reputational benefits their data-collection and reporting structures to respond; may accrue to companies that have a demonstrable 3 communication across the mining industry. leading commitment to the EITI, given the explicit support that companies can act as representatives for the EITI and organisations such as the uN, institutional investors and provide feedback to the wider mining industry, which helps development banks have voiced for Initiative. to ensure that disparate perspectives are reflected in EITI Thus, even where the EITI is in its early implementation discussions; and stages, companies can advance their business interests through 4 completing reporting requirements in a timely and early participation. cooperative way. Companies making payments to governments above an agreed threshold3 must fill out a In-country implementation of the EITI reporting template in order for the EITI process to be After companies have made a policy decision to support the validated in that country. EITI, implementation responsibility shifts to in-country It may be easier for larger companies to participate in these managers who face a range of practical implementation sorts of activities, but it is more valuable to have broad challenges within their operations. The following sections representation where possible. box 2 gives examples of Rio provide guidance on typical challenges faced by in-country Tinto’s support for EITI implementation in two countries. managers. After learning that the EITI would only be applied to companies in active production, Rio Tinto sent a letter to the EITI Encouraging governments to adopt the EITI working group stating its willingness to adhere voluntarily to The mining industry has been a strong advocate for the Initiative, even though the company was still in exploration. governments to adopt the EITI in some countries. In Ghana – Anglo American made the same request. The MEM has agreed which has a substantial and growing gold mining industry – to meet with the two companies to explore this proposal. Newmont, AngloGoldAshanti, Gold Fields and the national mining chamber combined to encourage the government to The role of business where local industry is diverse and implement the EITI. Ghana has a long history of mining, but the lacking capacity sector’s fortunes have varied substantially, with investment Countries with a diverse mining industry face particular periodically plummeting. However, in recent decades challenges. The industry may be composed of a range of progressive reform has led to more favourable conditions, and company types, each with different cultures and objectives: investment has grown markedly. Greater transparency, formalised by the adoption of the EITI, has been a key signal of Box 2. Support for EITI implementation in Madagascar and Peru the Ghanaian government’s commitment to reform. Madagascar In Madagascar, Rio Tinto has appointed a representative to the Indonesia is another country where mining companies have multi-stakeholder working group. The company has also supported the advocated adoption of the EITI. Newmont has provided country's application to Candidate status and the initial government EITI leadership by disclosing payments to government and working group. In addition, the company has facilitated extensive EITI engagement sessions with regional administrators, national government supporting Indonesia’s publish What you pay campaign. representatives and civil society groups. The lessons are clear: where a company is an investor in a Peru substantial new project or the operator of a large mine, it can be Rio Tinto has taken a number of steps to support EITI implementation in peru, expressing support for the Initiative via the national industry body an effective advocate in its own right, through cooperation with for mining and petroleum, SNMpE, and in a public meeting convened by other stakeholders and industry bodies. the Ministry for Energy and Mines (MEM). Source: Information provided by Rio Tinto ADVANCINGTHE EITI INTHE MINING SECTOR local companies, both big and small, and international Senior personnel from some mining associations are involved in companies from a variety of home bases, including emerging other international initiatives. They can play a very valuable role economies such as China, India, brazil and Russia. The sector by informing the local industry about links between the EITI and may be further complicated by a host governmental structure in broader efforts to improve governance in the sector, by, for which central, provincial and local governments all have example, civil society or multi-lateral institutions. different views on revenue transparency. potentially, these are the types of situations where the EITI can offer the greatest Supporting civil society benefits, but they are also the ones where the challenges and Civil society participation is essential for any country’s EITI resources required for implementation are greatest. process to be validated. The Validation Guide requires“civil In these circumstances, enlightened companies that are society [to be] actively engaged in the design, monitoring and familiar with the debates around the EITI – concerning the evaluation of the process and contribute to public debate”. potential to reduce misappropriation of resource revenues, Companies need to understand the local context before they for example, or improving development outcomes through decide how or whether to assist civil society, and specifically, enhanced governance – have the opportunity to provide whether it will be possible for civil society to participate leadership. Such leadership can have reputational and properly. Where the answer is yes, companies may wish to relationship-building benefits for the companies concerned, provide support to enable diverse but representative and improve the practicality and legitimacy of the EITI participation. Of course, such support must be unconditional procedures adopted. While experience has shown that and might include sharing skills and information with civil companies from countries with less of a tradition of transparency society groups in order to encourage self-organisation: one of are unlikely to obstruct or delay EITI implementation, they may the reasons preventing civil society from active engagement not be best placed to play a leadership role initially. may simply be that the groups lack access to information about Support by leading companies can include voluntary the implementation process. assistance for smaller companies, perhaps through the Where a country has taken the decision to implement the EITI, national chamber of mines or through existing business and where companies are concerned that effective civil society relationships. Typically, this can include information-sharing, participation is unlikely because of“undue restraint or coercion”, representing the broader industry in the multi-stakeholder greater care is warranted. Companies will be reluctant to group, making resources available for multi-stakeholder become involved in politicised debates that could jeopardise activities, and providing guidance from the company’s their own relationships with the government or prompt experience in other jurisdictions. Such support is dependent accusations of straying beyond their legitimate role. on leading companies having relevant experience of EITI In these circumstances, the most appropriate role for companies implementation to share. might be to explain to governments the potential business benefits that the EITI offers, and to voice their in-principle The role of mining associations support for the Initiative. This might extend to drawing a Industry representative bodies can be the most effective vehicle government’s attention to the risks, further down the line, of the for participation in the EITI, assuming that the association has a process being found to be non-compliant during the course of unified view on the EITI. And even if it does not, an association Validation. In extreme cases a company might choose to convey can be useful as a forum for industry to debate its views and to a government its reluctance to participate and invest in a attempt to form an effective position. process that does not follow the official, internationally Specific potential roles for mining associations are: endorsed EITI criteria. • encouraging governments to sign-up. In some countries (Ghana and Zambia are two examples), the country’s mining What taxes and payments should be reported? industry has actively encouraged the national government In Chapter 4, the concept of an Effective Tax Rate (ETR) to join the EITI; was introduced and it includes all payments required of • supporting smaller companies. Here the role could be companies by governments. The ETR is what determines the two-fold: representing the broader industry, including competitiveness of a country’s tax regime internationally, and its smaller companies, and being an information-sharing forum importance suggests that it should be the measure used in the for all companies; EITI, hence all payments to governments (corporate taxes, • supporting communication and outreach. Mining royalties, duties, licence fees and employees’pAyE taxes) would be associations can provide representatives for reported. Further, where they exist,‘voluntary’taxes (such as multi-stakeholder groups and publicise information to payments to the Voluntary Support Fund in peru) should also be general audiences about the EITI, as was done by the disclosed, particularly when they fall outside the formal tax Mongolian National Mining Association. system, because of the risk, or perceived risk, of corruption. ADVANCINGTHE EITI INTHE MINING SECTOR Equally, disclosure must cover payments to all levels of Communication with stakeholders about mining government. taxation The specific issues of voluntary payments (social investment Mining taxation is an emotive and topical public issue, and, as payments, for example, or charitable donations) and spending explained in Chapter 4, the quantum and timing of payments on socio-economic development activities are less clear-cut. varies with cycles in the industry, both project development Social investment and voluntary spending are treated very cycles and price cycles for particular minerals. It is also the case differently for tax purposes in different countries. While that mining investment occurs in a competitive international considerable sums of money may be involved, current thinking marketplace and relative taxation is a primary consideration in inclines against publicising these payments within an EITI investment decisions. reporting template. The main reason for this is that there is no It is in the interests of all stakeholders for a country’s tax equivalent entry on the government side and it is difficult to system to be well understood and to be seen as being fair and verify them in the same way as (for example) formal tax or reasonable. Ideally, this point is best understood in the context royalty payments. Many companies currently publicly report of the mining industry’s overall contribution to a country’s on such expenditures. development because payments to government are only a A more difficult area is where companies’investment in component of complex processes leading to that development. public goods may in some cases be in lieu of taxation. Here it is benefits from foreign investment, employment-creation and necessary to distinguish between those investments that have a training, purchases from suppliers and the stimulus to direct business purpose and those for public purposes. This is institutional reform can all be more important than the tax take. particularly challenging in cases where infrastructure is shared, It is very much in the interests of companies to obtain a such as a new road. In these circumstances, companies should factual understanding of their contribution to development, report the means by which they have classified investments as even if it is modest and can be strengthened. This enables either private or public. industry to be an informed participant in national development It is only through comprehensive reporting that the EITI’s debates and to influence public policy. Industry must therefore goals of promoting transparency, improving governance and clearly and credibly communicate its case, and multi- strengthening trust can be achieved. It is in the interests of all stakeholder EITI forums provide an excellent vehicle for stakeholders that a full picture of the industry’s financial this to happen. Specific practical steps that companies contribution is provided. can take include: Appendix 1 provides sample reporting templates for mining • providing the information on websites and/or in companies.The templates are intended to be illustrative, and sustainability reports that the company supports the EITI will need to be adapted to suit the circumstances of each process in that country and has completed the reporting jurisdiction. Also, it would be desirable to include provision template. (A link can be provided to the country’s official EITI in EITI country work plans for reporting templates to be website); and periodically reviewed and improved, particularly in situations • becoming actively engaged in multi-stakeholder where the capacity of governments and industry is initially low. communications groups or supporting such groups with other resources. Should government expenditure be tracked and The EITI Secretariat has developed guidance on communicating reported? the results of the EITI process in its Talking Transparency: How to EITI procedures do not currently require monitoring and communicate the EITI. disclosure of how and where government funds from extractive industries are spent. Arguably, this is a significant omission Conclusions because expenditure is such an important determinant of The mining sector is very diverse both internationally and within development outcomes, and the benefits of greater transparency particular countries, which means that EITI implementation apply equally to government transfers and to payments by processes will vary from country to country. The key need is to industry to governments. protect the EITI principles of transparency and inclusiveness. It is therefore important to note that EITI procedures provide The business case for the EITI can be viewed as facilitating an flexibility in implementation and that some countries have operating environment that is more supportive and secure for broadened the scope of the EITI. In Nigeria, for example, the EITI business. Implementation of the EITI in any country is a lengthy process was extended to cover the amount of money the process and different country-specific procedures are still government invests in joint ventures. emerging in all Candidate Countries. It would be possible in these circumstances for mining companies to take a passive position and allow others to fashion the procedures. but this would be a lost opportunity, as early participation enables ADVANCINGTHE EITI INTHE MINING SECTOR stakeholder collaboration and the building of trust, and development of procedures that are practical and user-friendly. After a policy decision is taken by a company’s head office to support EITI implementation, responsibility shifts to in-country managers. They face a range of challenges and are well advised to work through the country’s national mining association or a special purpose industry group. Where this is not feasible, individual companies can still be effective participants. key activities are to join and contribute effectively to the local EITI multi-stakeholder forum, which may also involve supporting civil society engagement. Communication about the local industry’s contribution to public revenues and to overall national or regional development is in the interests of all parties, provided it is credible and clear. The ICMM is a CEo-led industry group that addresses key priorities and emerging issues within the mining sector. David Prescott was lead writer of the EITI Business Guide published in 2008. Paul Mitchell was President of ICMM until May 2008. Notes 1 This chapter was prepared by the ICMM Secretariat with the support of Dave prescott, a freelance writer, and with editorial input from paul Mitchell, Mitchell Mclennan pty ltd. 2 See for example the reports from the resource endowment initiative on ICMM’s website and “Escaping the Resource Curse” by Macartan Humphreys et al, published in 2007 3 Every country will decide a threshold for payments above which companies will be required to report. This threshold is sometimes referred to as the “materiality threshold”. ADVANCINGTHE EITI INTHE MINING SECTOR Appendix 1 Sample EITI reporting template for mining companies Input template for company reporting entities Company reporting: Reporting period: SCOPE 1 BENEFIT STREAMS line Guidelines Volume Value Ref section 6 Ref 1 benefit streams from international and national state-owned company a) Corporate taxes i b) Royalties ii - in cash - in kind/sponsorships, i.e. sports, etc. c) license fees, rental fees, permitting fees and other considerations for licenses/concessions, ground rent, property rate iii d) Signing bonuses and production bonuses vi e) Dividends vii f) Other payments to host governments, specified as iv, v, vii (including payment made through production entitlement): Exclude: - Tax levied on consumption (e.g. VAT/GST/sales taxes) - pay as you earn (pAyE) income taxes - Social payments (unless statutory requirement) SCOPE 2 BENEFIT STREAMS line Volume Value Ref 2 Scope 2 benefit streams (voluntary disclosure): ...... MANAGEMENT SIGN-OFF We acknowledge {or on behalf of the Board of Directors (or similar body)} our responsibility for the fair presentation of the Reporting Template in accordance with the Reporting Guidelines, with the exception of: Name OFFICIAL Signature STAMP Position Date ADVANCINGTHE EITI INTHE MINING SECTOR Appendix 2 Sample EITI reporting templates for sub-national governments Input templates for metropolitan, municipal, district assemblies Name of District Assembly: Reporting period: A.PREVIOuSLy uNREPORTED PROJECTS/ROyALTIES PAyMENT 1. Mining royalty payment received and not reported for the previous period. a) Total amount b) Total expenditure (from the amount above) c) Total amount remaining after disbursement d) Indicate in the table below the disbursement for the amount expended (as in b above). B. PROPERTy RATES a) Total amount Name/location Name and address Duration Estimated Actual Remarks/ of project of contractor cost (¢) cost (¢) Progress of work e) Indicate in this section (table below) any in-kind payment received by your District Assembly Nature of in-kind Cash/in-kind Name of providing Duration Remarks payment payment instituion C. CuRRENT REPORTING PERIOD 2. State in this section the disbursement received as mineral royalties. f) Total mineral royalties received g) Total expended from the amount above h) Total remaining after expenditure (f-g) i) Indicate in the format below the disbursement of the expended amount stated in (g) above. Name/location of Name and address Duration Estimate cost Actual cost Remarks/ project/investment of contractor Progress of work j) Indicate in this section any form of in-kind payment received by your District Assembly Nature of in-kind Cash/in-kind Name of providing Duration Remarks payment payment instituion MMDASIGNOFF We acknowledge our responsibility for the fair presentation of the reporting Template in accordance with the reporting Guidelines, with the exception of: Name OFFICIAL Signature STAMP Position Date ADVANCINGTHE EITI INTHE MINING SECTOR 1 A MINING SupplEMENT TO “DRILLING DoWN – ThE CIVIL SoCIETY GUIDE To ExTRACTIVE INDUSTRY REVENUES AND ThE EITI” EVELYN DIETSChE and ELIzABETh BASTIDA andThE REVENUEWATCh INSTITUTE1 Introduction Who are the government stakeholders of the mining sector Since the EITI has tended to focus on countries with substantial at the national level? oil and gas resources, descriptive information on the extractive It is important to note that governments use all kinds of industries and the EITI process is often written with these administrative structures for their mining sector which may countries in mind. This chapter provides a mining supplement include any number of combinations of entities. Although to“Drilling Down – The Civil Society Guide to Extractive Industry organisational structures vary from country to country, in the Revenues and the EITI”,published by the Revenue Watch 1990s many countries adopted a structure that formally Institute in June 2008. The supplement points to some allocates extractive sector responsibilities to six entities: important differences between the petroleum and mining • a ministry of mines, acting as the political head; sectors that civil society organisations engaged in the EITI • an office that administers mining rights at the process should be aware of. It seeks to help civil society administrative level (a cadastre office); organisations better understand the nature of these differences • a geological survey department; and what consequences they hold for civil society engagement • a minerals promotion agency; with the EITI. This chapter should be read in conjunction with • an environmental office; “Drilling Down”,to which it makes frequent reference. • a tax authority and/or other revenue collection authorities. These entities may be located within the same ministry, or they The Four Phases of the EITI process related to mining may include semi-autonomous government agencies. Civil The EITI validation methodology sets out country obligations society organisations should deepen their understanding of the in relation to the four phases that mark the EITI process: the remits of the different government entities and the allocation of Sign-up phase, the preparation phase, the Disclosure phase and responsibilities for the various aspects of the mining sector. the resulting Dissemination phase. This section cross-references The mining law (perhaps referred to also as the mining code, mining-specific questions that should affect civil society mining act, or mining statute) usually includes a chapter engagement throughout each of these four phases. establishing the organisational structure of government authority over the sector. The Sign-up Phase Other governmental organisations with a strong role to play The Sign-up phase is the period when a government must in the EITI process include the relevant supreme audit demonstrate that it is serious about the EITI. This is the time to institutions. These institutions (in some jurisdictions referred to get organised, to establish objectives and deepen knowledge as the external audit office) carry out the external audit of public about the extractive industries present in the country. sector bodies. They are the national bodies responsible for 100 ADVANCINGTHE EITI INTHE MINING SECTOR scrutinising public accounts and thus, in most countries, information on these is given below). constitute the formal system of financial accountability. • Small and artisanal miners mostly concentrate on the In mineral-producing countries, special attention must also production of“high unit value products”– gold, for example be paid to indigenous peoples who have their own traditional – where specific geology makes less capital-intensive leadership structures that represent important constituencies mining possible. These miners run very small operations and of mining-affected communities (and can sometimes be contribute minor shares to global production. but they undermined by governments and companies in an effort to provide employment and livelihoods to many people. They gain access to mineral deposits and wealth). often operate“on the fringes of the law”,in part because of the failure of many countries to formalise artisanal mining Are there sub-national government entities that levy or activities, and often face very severe health and safety risks. receive mining revenues? In countries with federal political-administrative systems, Does the state own parts of the mining industry? sub-national government entities may be able to directly collect Though they do not play as dominant a role as national oil mining revenue. There may also be a system that shares companies play in the petroleum sector, state-owned mining earmarked amounts of mining revenue between the national companies do have a significant impact in some countries. and sub-national tiers of government. Non-federal countries prominent fully government-owned examples include may have a resource revenue-sharing mechanism in place that Gecamines of the Democratic Republic of Congo (DRC), channels some mining revenue back to the regions and Codelco of Chile, and lkAb of Sweden (iron ore). In most cases, localities where mining activities are undertaken. state-owned mining companies focus on the extraction of a In some countries mining companies contribute directly to specific type of product. the finances of local government authorities, including With high mineral prices, state-owned companies have traditional authorities. Such arrangements may be a legal emerged in new settings in recent years. For example, South requirement, they may have been negotiated and/or be Africa has set up the African Exploration Mining and Finance customary, or payments may be made on a voluntary basis. Corporation, and Gambia has also announced the creation of a In the case of peru, for example, companies enjoying stability new state-owned company. These developments have agreements have negotiated“voluntary contributions”to local implications for contractual practices, and revenue and other communities (not necessarily through local government benefits streams, that demand full analysis and assessment. entities) as a substitute for windfall profits taxes. However, such analysis has too often been insufficient. Mining countries have sometimes formed joint ventures What types of companies are involved? between state-owned companies and multinational companies, The mining sector shows great variety in the types of mining or have contracted to take an equity stake (which can take companies and the sizes of their operations. Mining operations various forms) in an enterprise. For civil society organisations, can be very large and capital-intensive or very small and it is important to understand the nature of state equity labour-intensive. The following mining company types may participation and partial ownership arrangements. Equity typically be found: participation may form the basis for the bulk of government • Large multinational companies operate in many countries. revenues if the fiscal system is so structured, and in addition to They select their exploration and project targets on a global the country’s law, joint venture agreements may determine the basis and they also sell their products on the world market. government’s level of managerial control. These arrangements • Medium-size companies typically operate one or several may also require that governments contribute public resources small to medium-size deposits in one country or region and towards meeting a project’s capital requirements. often trade in locally and regionally traded minerals, Various countries require some form of state equity including industrial minerals. Such companies could be participation, either as a general rule or with respect to the owned by domestic or international entrepreneurs. development of specific projects, such as those related to • Junior companies are smaller and typically very dynamic, deposits that are already well known. This has been common often focusing on higher-risk activities such as mineral particularly in Francophone West Africa. From the 1990s through exploration. They operate globally and often seek to the first few years of this century, the trend has been to reduce negotiate deals with larger companies once they have made state equity participation as a result of the lower commodity a discovery. Others aim to gain a controlling interest in an price environment and the inability of countries to provide or established operation. These companies are driven by raise their share of capital. More recently however, the sizeable short-term interest. commodity price boom has led many countries to seek greater • State-owned companies can also be very large and sell direct ownership in strategic projects, and a number of countries globally. They typically focus on one or a few products (more have moved towards increasing state equity participation. ADVANCINGTHE EITI INTHE MINING SECTOR 101 What types of mining processes are used? while others have many. likewise, some have many users It is important to understand the main types of mining (rutile); others have only a few (uranium). These factors affect processes that are used in a country. They can bear important supply and demand, bargaining powers, and also the risk of legal, fiscal, environmental and social consequences. substitution. • Surface mining extracts minerals from the surface, removing Of course the types of mining products a country produces overlying earth and rocks to expose the mineral(s). This is also affect the transportation and utilities infrastructure that a the predominate process for metallic mines and includes project requires (e.g. energy demand, road construction, access open-put and alluvial mining. to ports, etc.) and thus its cost structure. • Underground mining involves extraction below the surface, Where possible, civil society organisations should consider generally disturbing the topsoil to a lesser degree but establishing relations with others located in countries that involving higher costs. produce similar mining products, in order to compare legal, • Solution mining dissolves ores lying in deep deposits with financial, pricing and marketing arrangements. Care must be chemicals and then pumps them up to the surface (e.g. salt, taken in making comparisons, however, as differences in potash and uranium deposits). geology, infrastructure, geography, and any number of other • Water-based mining gathers minerals in river beds and factors can be determinative of the profitability of a particular coastal waters amenable to dredging. This is used to extract mine. Some mining products can only be commercially mined in relatively dense minerals (gold, diamonds, tin, titanium a few locations and the demand for some products may be very minerals, or zircon). concentrated and very specific. Moreover, comparisons of • previously discarded minerals may also be extracted individual legal or fiscal terms can be misleading, as legal and through waste dump or tailings re-treatments. These fiscal regimes can only really be compared if they are considered processes become more attractive with rising minerals as a whole. prices. The Preparatory Phase What mining products does the country produce The preparatory phase is the most important phase in the EITI and export? process. Fundamental decisions need to be made about how Some mining products are of very high value compared to their the multi-stakeholder group is to be set up and who is to be volume (diamonds and gold) and may generate a lot of waste, engaged. Civil society organisations require a good overview of while others have a low value compared to volume (construction the governmental, mining company, investor, and other materials). These characteristics can call for different legal and stakeholders affected by mining activities. This phase also fiscal regimes. For example, regulations specific to diamond involves getting to understand the revenue streams and trading are applied in countries such as South Africa and Canada. whether there are legal and other obstacles to stakeholders' In Canada the kimberley process is said to have contributed to participating in the EITI process. strengthening procedures for the outbound shipment of rough diamonds. Another example of where differences can be called Who are other key stakeholders to engage in the mining for is in cases where local value added to a resource is low. legal sector? regimes can try to counter this with specific provisions in support This chapter has already discussed government stakeholders of local beneficiation, i.e. value is added domestically through and the different types of mining companies that a country may smelting, refining, and other downstream activities. For example, host. South African legislation mandates local beneficiation with the In addition, national mining associations can be an important objective of generating additional employment and other stakeholder which civil society organisations should aim to economic benefits. engage early on. These organisations are not necessarily During the Sign-up phase civil society organisations should dominated by the views and standards of the large not only familiarise themselves with the types of mining multinational companies. National industry associations can products that are exploited and what they are used for; they predominantly represent small and medium-size domestic should also aim to develop some understanding of the markets companies and may have significant political influence. Other that these products serve and the national and international stakeholders from within the industry can include professional trade rules to which they are subjected. All these factors affect associations, targeting, for example, mining engineers as well as company risks and financial calculations and therefore the types trade unions. of legal regimes and contracts that are used. For example, some parliaments have great potential to play an effective oversight mining products can be rather easily substituted (such as lead or role. Civil society should consider raising awareness of elected copper), while others have very specific uses (such as gold). representatives and working with them to ensure good practice Some products have only a few highly specialised producers, in EITI implementation, as has been done in Ghana and Nigeria, 102 ADVANCINGTHE EITI INTHE MINING SECTOR for example. Supreme audit institutions are also of importance The following revenue streams, which are explained further in in this respect. Their role is to provide parliaments with an “Drilling Down”,may typically be expected: independent opinion on how the executive has used public • corporate income tax; resources. • windfall profits tax; • royalties; What are the typical revenue streams? • sales tax, excise tax and VAT; production-sharing agreements, which play a major role in the • payroll tax; oil and gas sector, are very rarely applied in the mining industry. • import and export duties; Resource revenues in the mining industry are mainly received in • land rents, property tax, and application/issuing/registration the form of different types of taxes and royalties (see“Drilling • fees and stamp duty; Down”for the main form of revenue streams). With very few • withholding taxes on loan interests and services and/or on exceptions (e.g. coal in Egypt), there is no sharing of physical remitted dividends; mining outputs. • dividends, if there is state participation and/or state An alternative to the traditional fiscal arrangements is ownership. exemplified by the recent contracts with Chinese companies Civil society organisations should be aware that in some that include the provision of infrastructure in return for the countries (e.g. Chile) mining projects are taxed similar to other mineral rights. For example, a recent large DRC China contract is economic sectors. They are subjected to the general tax regime structured as a loan, and the costs of large-scale infrastructure with some special provisions that cater to the particular projects managed by Chinese-led consortia are to be repaid out characteristics of the sector. but in many countries the mining of the proceeds of the exploitation of the DRC’s deposits. sector, or particular mining projects, enjoy special tax regimes, large-scale signature bonuses represent the only significant which may or may not have been negotiated bilaterally. This up-front cash payment that the DRC government is to receive, means that in practice, different fiscal regimes can exist for but the deals provide for the government to benefit from different mineral deposits and different minerals in a particular billions of dollars of direct infrastructure construction, at country. relatively favourable interest rates. beyond the opportunity that these deals create for rapid physical development, they also What is the tax base? impose certain risks. The government faces significant price risk, It is important to recognise that tax bases are just as important because it must repay the full value of the infrastructure loans as tax rates for understanding government revenues. If we know even if prices drop. Civil society should also pay close attention that the corporate tax applied to a mining enterprise is 30%, the to the appropriateness of the priority given to such next question has to be:“30% of what? ”The fact that tax bases infrastructure projects and to monitoring procurement and differ across countries (and indeed within countries where other construction costs, which could exceed the value of the individual contracts give each mine a unique fiscal regime) infrastructure delivered but would still need to be repaid in makes the comparison of tax rates very misleading. mineral revenues over a period of many years. For direct taxes, the tax base can generally be thought of as In cases where there is government equity participation, civil gross revenue minus costs. Countries allow different kinds of society organisations should identify the terms, as equity costs to be deducted from revenue. Often more important that participation can take very different forms. So-called“free the kind of costs allowed, however, is the timing of the equity”,where the government receives rights to a share of deductions. For example, heavy up-front exploration and profits without having to fund the enterprise, is a common development costs may be deducted immediately in one approach. It is important to note one common risk of free country but deducted over a period of years in another country. equity, which is that if companies are giving government equity These differences can have significant impacts on the revenues without compensation, they may be carving out ways to make due to the government. Another aspect of the tax base that is up for it elsewhere in the fiscal arrangements. A government very important is the determination of the scope of the taxable may also take a“carried interest”,whereby the government has entity. For example, each mine may be“ring-fenced”as a an obligation to pay for its equity shares but does so by separate taxable enterprise, or several mines owned by the foregoing some portion of future revenues, often with the same company may be taxed in the aggregate, with costs from interest accreting over time up to some pre-established one mine reducing taxable revenues from another. And in some threshold. A country may also acquire equity through raising countries CSR spending may be income tax deductible and in capital and buying shares. Each of these approaches may also others it may not. involve some sort of direct role in the management of the Countries with weak administrative systems and revenue enterprise (as distinguished from the government’s regulatory collection competencies may rely heavily on companies role) – though the receipt of board seats, for example. self-reporting their tax liability. Some governments suffer ADVANCINGTHE EITI INTHE MINING SECTOR 103 capacity constraints in monitoring and auditing whether the tax However, NGOs are increasingly bringing cases forward using base has been properly calculated by the company. There have ATI laws to seek disclosure of contracts and/or disclosure of been concerns that intra-corporate financial flows and transfer payments and receipts information. pricing have allowed companies to artificially reduce profits, Governments can legislate or require transparency. For effectively moving them abroad to another related entity and example, in Nigeria, the president issued a requirement that thereby avoiding proper taxation in the country where the all companies report on an individual (disaggregated) basis mining took place. and that this information would be made public. In peru, there Most types of royalties are payable on the basis of production is a debate about whether the tax laws allow such individual volumes or sales values. In rare cases they are also based on disclosure. It is a key objective of the EITI to review existing laws some measure of income or profits. Combinations of different and regulations to identify potential barriers and look for types of royalties may also be applied (in Ghana, for example). solutions that allow appropriate disclosure. Civil society may One challenge in respect of royalties payable on production need to undertake or contribute to this analysis, and advocate volumes or sales values is whether they have been calculated at for such edicts or laws where needed. the correct stage and with the correct prices. The Disclosure Phase Setting the scope for the EITI and development of the During the Disclosure phase the EITI auditor or aggregator reporting templates delivers the EITI report to the multi-stakeholder group, and The structure of the revenue streams and the tax base are key discrepancies between company-declared payments and in determining the scope of the EITI and the content of the government-declared receipts are laid open. reporting templates. The latter are crucial in ensuring that all the key revenue flows are reported and reconciled. What kinds of discrepancies and lessons have EITI reports A key issue will be materiality: determining which payments in mining countries identified? and which entities should be included in the scope of the At the national level, EITI reports have been used to identify national EITI. For example, the existence of many small and specific discrepancies in revenues paid and received that may artisanal mining companies can pose a challenge. It may not be suggest mismanagement, corruption, or poor administrative feasible (at least up front) to include all of them in the EITI capacity. For example, the first Mongolia EITI reconciliation process. Compromises have so far included reporting revenue report in 2006 identified discrepancies that could not be streams by individual companies only above a certain value. explained of more than 25 billion tugrugs (uS$20 million). Small and artisanal miners may also work in the informal This raised numerous questions regarding the integrity of economy, in which case they are not formally taxed. government revenue collection, management and reporting There is merit in capturing as much information as possible systems at the national and sub-national level, and the about this segment of the mining sector, not least because possibility that companies may have been including illegal of its high employment and environmental impact. However, payments, donations and bribes they pay to government the information submitted has to be audited and reconciled, officials. In Ghana, early EITI reports identified a lack of and both can be extremely costly. The cost-benefit of independent checks on the amount and grade of gold produced different options should be forecast and discussed by the by companies, and the lack of formalised collaboration between multi-stakeholder group before a final consensus approach the IRS, the Mineral Commission and other government is incorporated into the reporting templates. agencies on matters relating to the payment of mining benefits. Ghana’s reports have also identified under- or non-payment of Are there potential obstacles to participating in mining royalties by certain companies as a problem. transparency initiatives? EITI reports have also raised awareness about revenue In some countries the fiscal and other terms of mining projects management systems and the amount of resource revenue that are not made public. Companies and governments may claim to countries are receiving. To the extent that the EITI generates a be bound by secrecy clauses to keep terms unknown. However, more accurate and comprehensive picture of mining revenue disclosure is typically permitted by the contracts if both parties streams, this information often raises important questions agree to it. The key may lie in getting both parties to agree to about implementing countries’ability to effectively set, manage, the principle of disclosure, either separately or together. monitor and audit their fiscal regimes (more on this below). EITI In countries of Eastern Europe and Central Asia, laws on mining reports can also raise awareness and identify concerns state secrets and broad regimes of classified information have about countries’mineral sector tax base –“Drilling Down”points undermined the efficacy of participation laws. In many countries to the Ghanaian EITI report, which highlights low tax receipts in latin America and Africa, Access To Information (ATI) and various areas of administrative weakness, and makes legislation is not comprehensive and/or enforcement is weak. recommendations on how they could be addressed. 10 ADVANCINGTHE EITI INTHE MINING SECTOR At the sub-national level, several mining countries’EITI types of contracts, primary forms of government revenue, reports have noted discrepancies with respect to payments entities managing revenues and key areas of vulnerability in made to state, local and traditional leadership entities. In the extractive industry accounting. The section presented here case of Ghana, the recipient sub-national Office of the focuses on issues where the mining sector differs from the Administrator of Stool lands could not account for funds general picture conveyed in“Drilling Down”. disbursed by the Inland Revenue Service. In the case of Guinea there were discrepancies with respect to moneys paid by Mining legal and economic framework companies to local administrative entities. The global mining industry has been shaped by the Administrative capacity and public transparency mechanisms developments that have evolved over the past couple of appear to be weakest at the sub-national level, which poses decades. They have set the political and economic background problems for the accountability of revenues transferred to for current mining regimes. Recent years have seen several sub-national entities. One root cause of this problem may be fundamental changes to earlier arrangements, some of which that informal/traditional power-holders who receive funding are still evolving. This makes it difficult to provide a broad and have not been fully integrated into the political-administrative general picture. system that oversees the use of public resources. As in Ghana and Guinea, the EITI may be able to raise awareness of these How has the mining sector evolved over the past couple of problems at the sub-national level and contribute to domestic decades? constituencies potentially addressing it. legal and regulatory reforms undertaken in the late 1980s and early 1990s emphasised the (re-)privatisation of state-owned The Dissemination Phase enterprises, the provision of stable and internationally Effective disclosure depends upon the readiness of the competitive fiscal regimes, liberal foreign exchange regimes and multi-stakeholder group to publish and distribute the EITI report greater reliance on standardised mining laws, as opposed to and to generate effective follow-up of recommended actions. project-specific negotiated arrangements. Some have argued that this context of reform has led to a“race to the bottom”in The Dissemination Phase provides a learning opportunity which countries have offered foreign direct investors overly EITI reports provide a powerful opportunity to reveal and generous conditions, to the detriment of those countries’ explain what types of problems have been encountered by economic, social and environmental well-being. mining countries. For example, the Ghanaian EITI report has The argument behind the late-20th century revealed the lack of formalised systems (and perhaps also the investment-friendly mining law and agreement reforms focused qualified manpower) to ensure effective enforcement of and on balancing risks and rewards for the industry at a time of low compliance with fiscal regimes, especially in establishing the commodity prices. The argument was that high political risks in correct tax base. The EITI report should be seen as a tool to help low-income and emerging market countries raise the costs of government entities improve inter-governmental coordination capital, and that investor protection regimes were necessary in and adopt a coherent and country-specific approach to order to sustain investment. The benefits to the host countries designing, monitoring and auditing mining fiscal regimes. were expected to be supplemented by the spill-over and/or Governments need to be given incentives to become more multiplier effects of investment. More recently it has been active and to focus on multi-stakeholder consensus-building. acknowledged that such effects are neither automatic nor certain, and that the risks to host country governments and Should dissemination reach the sub-national level? societies may have been undervalued (or ignored). Moreover, In mining countries the sub-national outreach of the EITI countries are beginning to think more rigorously about whether process and results can be very important, particularly if there is proceeding with extraction at a particular site is actually the a revenue-sharing formula in place. Civil society organisations most economically and developmentally beneficial course of should be mindful that the risk of a local“resource curse”can be action. considerable even if, at the national level, mining revenues Over the past five to ten years, mining countries have comprise a relatively small share of total government revenue. increasingly begun to revisit and revise their mining policies and It is also important to keep in perspective the amounts of laws – until recently in a context of historically high commodity mining revenue that are received in relation to overall prices – in an effort to capture a greater and, in their view, more sub-national budgets. equitable share of the revenue windfall. Many recent reforms, especially in Africa, Asia and latin America, have been business and industry concepts for mining undertaken with an eye on maximising government take part II of“Drilling Down”explains for the extractive industries through creating fiscal frameworks that are responsive to more generally the legal and economic framework, primary commodity price volatility and share up-side and down-side risk ADVANCINGTHE EITI INTHE MINING SECTOR 10 more evenly. There is also a new focus on identifying a broader rise to conflicts when national governments issuing licenses vision for national development that connects mining sector have disregarded local/communal land rights or consultation policies to larger development goals. Countries that have processes. In some countries, for example in Chile, in peru, and recently initiated mining reviews and policy reforms include in bolivia under the 1997 Mining Code, the process for granting South Africa, DRC, Sierra leone, Indonesia, Mongolia, Ecuador, mineral rights is separate from setting the regulatory conditions Guinea and bolivia. that affect these rights. Thus, companies can be granted a mineral right before getting the regulatory permits required to What does mining legislation entail and how is it usually use that right. set up? Special regimes might apply to areas of known prospectivity In general, mining legislation defines mineral ownership in the or projects or mines studied or developed by the state. The subsoil and sets out the rules and procedures that govern mining law defines the political authority that will grant mineral company access to mineral rights and the conditions for rights. This is important for identifying the relevant government operation (the“licensing”;“concessionary”regime). In addition, stakeholders during the preparation phase. mineral ownership is often also defined under constitutional Furthermore, the mining law sets out the rules and provisions. procedures for access to land and the use of other resources, In contrast to the variety of contract types in the petroleum and infrastructure requirements. It very often establishes tax, industry set out in Chapter 6 of“Drilling Down”,the legal customs, investment and environmental provisions that can be arrangement of granting concessions in the mining industry is specifically applicable to mining. These aspects often need to be most often combined with a fiscal regime based on a tax/royalty interpreted in tandem with the broader legal framework of a concession system and is set out in the mining law, i.e. it is country, which can in certain cases override or alter similar to the concession agreements described in 6.2 of arrangements spelt out in the mining law. For example, the “Drilling Down”.Tax/royalty systems generate the main benefit evolving land regime in peru has modified the original streams for the purposes of the EITI. Across the mining industry provisions on land use in the mining law. Miners can no longer and even within the same mining country there can be demand the expropriation of surface land, and now require considerable differences in how royalty/tax systems are set out. prior agreement by each specific landowner. Finally, the mining They can be specified in general law (i.e. the mining law) but law establishes the general terms and conditions for the use of they can also be negotiated in a contract. It is important for civil some forms of mining agreements (see next sub-section below). society to analyse mineral legislation at the start of the EITI process and identify all information relevant to the generation How do risks affect the structure and pacing of benefit and collection of mineral revenues, including fiscal frameworks streams? and administrative relationships and responsibilities. The perceived and actual risks of the mining industry, in A mining law sets the classification of minerals or mineral developing countries and more generally, have affected regimes in each country. Different minerals and metals often negotiations on and provisions catering to the types of costs have different specific regimes. Small-scale and artisanal mining that can be offset against revenue to determine taxable income, is also often governed by a specific set of norms; large-scale i.e. various types of tax allowances and special tax incentives. projects, too, are often provided with specific sets of regulatory Tax allowances and special incentives have included favourable provisions and guarantees, and in some cases government provisions for tax deductions (costs than can be used to reduce equity participation is mandated. the tax base directly, including carrying forward indefinitely A distinctive feature of mining regimes in contrast to oil and losses from previous years), tax credits (allowances that are gas regimes is that the former often rely on a general (and to deductable against taxes payable but do not reduce the tax some extent historic) principle of“first come, first served”as a base), tax holidays (periods during which defined taxes are not method to gain access to mineral rights. The original rationale payable), and exemptions from other generally applicable taxes for introducing this principle was to reduce government (e.g. import duties). All of these affect a country’s mining discretion and to cut red tape. The principle is used as an revenue streams. incentive for exploration and is a common feature across More recently a number of countries have begun to question countries that underwent recent reform. A common complaint the advisability of generous tax allowances such as long tax about the“first come, first served”principle is that it has led to holidays. In Tanzania, for example, mining companies have decreased government capacity to define mining policy agreed to voluntarily do away with legally granted tax holidays. because they are forced by this rule to issue a license. In some cases, though, the principle is“first come, first consider”,where a What are currently debated legal and economic issues? right is not automatically granted. As a result of strong global demand, prices for mining products The“first come, first served”approach has sometimes given have been rising in recent years, although a new cycle of 10 ADVANCINGTHE EITI INTHE MINING SECTOR contraction appears to have set in from mid-2008. In this sought to serve. In any country, the law should form the context a number of countries are discussing reforms to mining basis upon which the tax, custom, investment and equity legislation and have initiated or are considering the participation obligations of private sector investors are based renegotiations of mining contracts. Among the most important and the benefit streams to governments are established. issues put up for change are fiscal terms and requirements to Flexible provisions can be included to allow for the unique allow for state equity participation. A related discussion covers situations of individual mines. In some instances, especially in the need to balance the bargaining powers of private weak institutional contexts, countries have allowed mining companies and governments to achieve greater stability agreements to substitute for law on these matters, although through consensus and avoid more radical shifts in contractual many are now revisiting their legal extractive frameworks to relations. This discussion has supported calls for building the remedy this. capacity of governments to negotiate. It is best to make the laws as robust as possible and leave The recent re-emergence of a few state-owned mining relatively little discretion in mining contracts to ensure companies has been mentioned above. So, too, has the issue of consistent policy and uniformly protect countries’ reconsidering the rules that govern the determination of tax pre-determined national interests. This applies in particular to bases. Other currently debated issues are how firm stabilisation less developed countries emerging from periods of conflict, clauses should be in contracts, or whether they should be in where mining agreements substitute for the absence of mining there at all, and which fiscal mechanisms best transfer a share of legislation. excess profits to governments in a variety of circumstances. In countries where mining agreements have supplemented All these issues have been setting the background for the the mining law, especially to set out specific terms for large re-emergence of some types of mining contracts (see the next investment projects, they often pose limits on the manner in sub-section) which can be quite different from those applied in which governments can exercise discretion in the absence of the oil and gas industry. more specific mining legislation. Mining agreements often also provide for recourse to international arbitration and are subject Primary types of mining contracts to legislative ratification to gain the status of laws by General differences themselves. Mining legislation in Ghana and Tanzania provides “Drilling Down”describes three main types of contracts for the use of these types of agreements – they may be referred distinguishing between production-sharing contracts, to as development agreements, investment agreements, or concessions, and technical service agreements. investment promotion agreements, among a variety of other In the period up to the late 1980s, when state control in the terms. mining industry was widespread, the main contractual forms in understanding the rationale, function and the main clauses of the mining sector were indeed joint ventures, concession mining agreements is of great importance for the EITI process. agreements and service contracts. The extensive sector reforms Along with the laws, agreements set the institutional framework of the 1990s, however, moved countries largely towards an against the background of which revenue streams are emphasis on using general mining laws to govern the sector, generated. Some types of investment promotion agreements supplemented by agreements intended to generate greater offer extensive benefits and tax allowances to the investor for foreign direct investment. the purpose of making an overall royalty/tax system regime The decline of state-owned mining companies in the 1990s more attractive to private investment. In some agreements, has meant that there are very few technical service agreements royalties have been removed altogether, or are now being in place in mining countries today of the kind sometimes used re-introduced. Some countries have used mining agreements by national oil and gas producers. However, this could change for the purpose of setting up the specific terms of government over time with the re-emergence of state equity participation participation in a project. In countries where fiscal terms are not and the re-establishment of state-owned companies (for set out in relevant legislation, mining agreements are used to example, Venezuela, bolivia and Ecuador are assessing the set out the agreed revenue streams from the project. This can reintroduction of different types of arrangements for the mining also be the case (even in developed countries) for very large sector). production-sharing agreements are very rare in the projects for which general tax legislation is deemed unsuitable. mining industry, partly due to the limited and often specific The names of mining contracts and agreements vary marketability of a diverse range of mining products. considerably. This requires civil society organisations to focus on and identify different contract types by the functions they serve. What are the different types of mining agreements? To give some examples, we have summarised the following For the EITI process in mining countries, it is very important that general observations: civil society organisations understand the underlying rationale Industrialised countries usually rely on unilaterally specified and functions that the various types of mining agreements have mineral tenure regimes and fiscal terms to govern access of ADVANCINGTHE EITI INTHE MINING SECTOR 10 private parties to mineral rights. but there are exceptions. For ventures and arrangements between semi-autonomous example, in Western Australia, mining agreements have been state-owned companies and private investors. used for large, export-orientated mining projects that involve extensive infrastructure requirements. Which government entities manage mining revenues? In developing countries there is, generally, greater variety with What are the general differences from the oil and gas sector? respect to the use of laws and/or contracts and agreements. The mapping of revenue flows that“Drilling Down”describes Francophone African countries have commonly used mining applies generally to mining countries as it does to oil and gas agreements (convention minière) to set up the general legal countries. However, one difference lies in the previously framework applicable to projects in addition to mining titles mentioned fact that there are few national mining companies required under the general mining law.Thus the general that take an equivalent role to that of the many national oil mining law often includes a model mining convention.The companies. The role of joint venture companies in receiving and details of these conventions are negotiated bilaterally between managing mining revenue streams will differ on a case-by-case the government and the investor, and the agreements also basis, and civil society therefore needs to analyse each mining typically require legislative ratification. The mining convention project individually to gain a full picture of the country’s mining typically defines the rights and obligations of the parties in benefit streams and the terms on which they are collected. relation to the legal, financial and fiscal conditions applicable Another fundamental difference lies in the general absence of to the project. It usually provides extensive investment mining production sharing contracts. guarantees and, in some cases, government equity participation. Guinea, Mauritania, Niger, the Central African What is transfer pricing? Republic and Senegal use such mining conventions. Transfer pricing refers to instances in which the accounting Many countries in Latin America use the general so-called prices assigned to project inputs and outputs are partially or “concession”regime set out under the national mining law entirely based on transactions between related parties. (Argentina, Chile, peru, brazil, Mexico). under these laws, the producers sometimes manipulate transfer pricing arrangements concession is a non-negotiated, non-discretionary procedure for the purpose of minimising tax liabilities, by: for granting mineral rights. Nevertheless, in Argentina, for • inflating the reported costs of tax-deductible inputs bought example, where some known and studied deposits have been from affiliates overseas; and/or held by provincial state companies, these entities have • reporting sales values to affiliates overseas at a lower level negotiated agreements with private investors in spite of the than would be expected, given global market conditions. general regime established by the national mining law. Cross-country differences in income tax rates or the way income In contrast to other latin American countries, however, tax liability is assessed can also entice companies to transfer concessions in Colombia are contracts (categorised as an profits from high-tax to low-tax jurisdictions. “adhesion contract”). Columbia has recently modified its An example of transfer pricing is if the value of a product such mining code to allow the state to reserve areas for large-scale as bauxite is reported in the producer country at a low value in mining and to grant them to private parties under a contract order to lower taxable profits in that country, but is sold to an more similar to the type of concession agreement used in the affiliated purchaser in another country where the concentrate is oil and gas sector, i.e. a company is given rights to exploit all processed, and taken into account at a higher value there. The the deposits contained within a large geographic area. higher value applied in the recipient country reduces taxable Other types of agreements set out the parameters for profits there, because it is considered a cost. investors’and government participation in some Asian Global Witness’s investigations regarding the liberian Mittal countries.They included the Contract ofWork Agreements used, agreement (prior to renegotiation) focused on transfer pricing. for example, in Indonesia.The philippines uses so-called The agreement fixed royalties on the sales price, but because Financial or Technical Assistance Agreements that have been this company is vertically integrated it could set the underlying considered as a kind of service contract, with special sales price unilaterally. characteristics that include the de facto possibility of foreign Civil society organisations should note that vertically investors taking up to 100% equity in mineral ventures integrated companies (such as in the example given above) are In general, practice in mining agreements is much less not necessarily the norm in the mining industry, with one standardised than in the oil and gas sector.Within countries, notable exception being the large Chinese-based companies practice may also differ from the general mining law with that are playing an increasingly important role in mining regard to deposits that had previously been held by markets. Other vertically integrated companies are most state-owned companies. For example, in the DRC, numerous frequently seen in iron ore and bauxite-to-aluminium opaque contracts have been entered into, disregarding the production. The OECD has led recent discussions on transfer provisions of the mining law.These have established joint pricing issues and has published Transfer pricing Guidelines. On 10 ADVANCINGTHE EITI INTHE MINING SECTOR the issue of business restructuring of multinational companies, and spent. Similar problems arise for direct payments and it has recently released a discussion draft for the period CSR contributions that companies may make to local September 2008 to February 2009. communities and local public authorities. In most countries there are no systems in place to coordinate such spending with Sub-national mining issues and challenges for civil well-designed local development plans.This runs the risk that society organisations well-meant contributions may be wasted due to weak local Are mining revenues shared vertically, and/or can government capacity. In some instances payments by sub-national entities levy mining revenues? companies (including state-owned enterprises) to local Depending on the political-administrative set up of a country community leaders may be used deliberately to influence and other factors, there may be revenue flows from the central political decision-making. The EITI, reporting at the government to regional and local governments (revenue sub-national level, can help bring these instances to light sharing), or direct payments may be made by companies to and encourage greater accountability among both local regional and local governments (fiscal decentralisation) or even government and company actors. communities (direct contributions). Compensation payments and royalties are sometimes directly negotiated and received Key areas of vulnerability in accounting for mining by communities in producing areas. Throughout this chapter concerns have been raised about the In federal systems, for example in Canada, it is sometimes the ability of governments to effectively negotiate, implement, case that charges paid at a lower level of government can be monitor and audit tax payments, relying instead on companies deducted as costs against a tax that is incurred at a higher level to self-govern. Transfer-pricing problems are not uncommon, of government. For example, a royalty paid to a region may be although facts and examples are difficult to retrieve.The offset against an income tax liability at the national level. heterogeneity of mining products and how they are traded, marketed and priced further complicates the picture.The more What are the challenges with sub-national revenue flows? civil society organisations can learn about the products that the Where revenue-sharing systems are in place, the transparency country exploits and exports, the uses to which they are put of these revenue flows can become a highly politicised issue. and the market structures that govern their exchange, the Such is the case in peru, where on one hand there is a relatively more they will be able to explore whether national high standard of accountability and transparency around the arrangements compare favourably with the conditions mining revenue-sharing system, but at the same time, applicable elsewhere. spending outcomes vary and much less attention is paid to the Some areas of vulnerability are of a physical nature, where management of mining revenue collected by the central public administrators are ill equipped to monitor production government that is not subject to peru’s mining revenue levels, processing, and export volumes.These all have redistribution system. implications for establishing the correct tax base. Additional challenges can arise within such systems.The volatility of resource revenue experienced at the national level lessons from the field may be exported to the lower tiers of government less Specific to mining well-equipped to deal with it. Central governments may also While the EITI has only been present in mining countries for a decide from year to year to cut back on other transfers to those few years, there are a number of important insights from civil regions that benefit from mining revenue, thus instilling further society engagement to date that can be used to help activists, the uncertainty and unpredictability that undermines sound as well as companies, governments, international agencies and spending decisions.There can also be an impetus at the local other EITI stakeholders, to better understand the level, sometimes in response to demands from the central mining-specific challenges of implementation. government to“use or lose”resource revenues, meaning that local governments must spend their resources or revert them Social and environmental concerns are just as important to the central government at the end of the year.This mentality as fiscal transparency to many stakeholders (and sometimes legal requirement) often results in poorly Mining has generated a large number of social conflicts, planned and executed spending projects that are not environmental disasters and human rights violations that necessarily in the economic interests of local communities. understandably dominate the agenda of many citizens and Revenue-sharing systems can also apply to the channelling interest groups. Many civil society groups believe that the of mining revenue to traditional authorities in mining regions, environmental, social and human rights costs of mining are as is the case in Ghana. In Guinea, companies make direct too high. In numerous EITI mining countries, social and payments to local authorities, which, according to Guinea’s environmental concerns have given rise to civil society 2005 EITI reports, keep very poor records on revenue received movements that oppose mining altogether, and these activists ADVANCINGTHE EITI INTHE MINING SECTOR 10 tend to have little interest in the EITI and other initiatives that where mining is an important extractive industry that is easily take extractive activity as a given. likewise, some groups feel overshadowed by oil and gas. that in certain instances governments may attempt to use the EITI as a political tool to legitimise extractive activity in There are a large number of small and medium-size controversial contexts. Very often civil society activists want to companies in mining see concrete evidence that companies and governments are unlike the oil and gas sector, which is dominated by large addressing social and environmental problems first, before transnational corporations that typically adhere to a set of engaging in any dialogue around transparency issues, corporate social responsibility norms and practices, the mining including the EITI. sector is more diverse, with many small and sometimes local Concerns over the environmental and social impacts of companies that can be less sensitive to civic concerns and good mining have also led citizens to make broader demands for governance/transparency standards. In certain instances there transparency that extend beyond revenues to include are smaller, family-owned mining companies as well as contracts, reclamation funds and corporate social payments international companies and joint ventures, that do not list on which have largely remained outside EITI processes to date. stock exchanges. This divorces them from the international Ghana is one place where civil society has been able to push reporting standards, CSR principles and public scrutiny that successfully for corporate social responsibility payments to be larger companies are subject to.The EITI needs to reach out to included in their EITI reports. small and medium-size mining companies, to engage them in Many activists believe that focusing on revenue transparency global best practice rather than their continuing to“fly under alone will not alleviate the“resource curse”,and unless the governance radar”.The ICMM is one major umbrella conscious efforts are made to accommodate other legitimate organisation for large mining companies that is engaged in the accountability concerns of communities affected by mining, the EITI and promoting more responsible mining standards. EITI’s ultimate objective of improving development outcomes However, its membership does not encompass the small to in resource-rich countries will be lost.While some civil society medium-size actors that are playing an increasingly important groups in EITI mining countries have approached the EITI as an role in mining (and oil and gas) countries. likewise, for all opportunity to try to address social and environmental issues mining companies, large and small, actual practices do not through expanded reporting templates, others feel strongly always live up to stated standards, and civil society has an that the EITI is the wrong vehicle to address these concerns and important role to play in holding these companies accountable that separate, more targeted, sustainable mining initiatives are for their performance at the country level. preferable. Overall, it is important to recognise that the EITI is only one Mining involves a larger number of producing of many mechanisms focused on mining and development. communities with a diversity of interests at stake In any country, the EITI will not be able to address the whole Mining activity is often widely dispersed throughout a diversity of mining-related concerns that present themselves, country’s territory, creating a large number of producing and civil society has to weigh the costs and benefits of communities to engage. Mining also typically has more engaging in the Initiative on that basis.That said, for those dramatic local impacts, as discussed elsewhere in this guide. groups that do choose to participate in the EITI process, it can Mining often serves as the primary economic engine of the often provide new opportunities to build relationships with whole town that has been built around the company. It government and company actors, and ultimately raise concerns provides local employment, often builds intensive community about the extractive industries beyond EITI’s narrower revenue infrastructure, and leaves a large environmental footprint that transparency remit. must be managed. Given this confluence of impacts, some portions of mining communities often have tight links with the Mining can be harder to address in countries dominated by company and are generally supportive of them, while others oil and gas have been adversely affected and feel passionately opposed. In certain parts of the world, the mining sector has been less This can often lead to internal conflicts within mining-affected exposed to public scrutiny, especially in countries where oil and communities, which need to be taken into account.Trade gas are also present and represent much larger, higher-profile unions may clash with environmental organisations, and civil sources of national income. Issues of corruption and suspicious society cannot be treated as a monolithic entity. deals, social and environmental impacts, and other mining concerns seem to have more trouble bubbling to the surface Applicable to all extractive industries and gaining exposure in oil and gas-producing countries.This below are several key lessons learned from the EITI and puts a special onus on civil society (and other EITI stakeholders) mining that are important to keep in mind for all extractive not to neglect mining in countries like kazakhstan or Nigeria, industries. 110 ADVANCINGTHE EITI INTHE MINING SECTOR Civil society requires skill-building to take advantage Information sources of EITI opportunities A number of organisations provide further information on the mining The EITI’s multi-stakeholder format provides civil society with sector, its different products, their market characteristics and many other aspects of the industry. a unique opportunity to engage on a number of broader extractive sector policy issues, including contracts and fiscal • The Publish What you Pay Campaign (pWyp) is the leading global regimes as well as the utilisation of resources for development. civil society coalition working to help citizens of resource-rich developing countries hold their governments accountable for the Civil society often needs additional capacity-building to make management oil, gas and mining revenues. Members include major the most of these opportunities. Without a minimum level of international non-governmental organisations doing work on technical capacity, a lack of understanding of technical issues responsible mining, along with several hundred local NGOs in can create unfounded frustrations within civil society and producing countries. More about the campaign and links to relevant sometimes lead to unconstructive approaches with companies organisations can be found at www.publishwhatyoupay.org . and state agencies. It is crucial that all EITI stakeholders, • ARM is a global NGO initiative working to develop a responsible including companies and governments, consider how they can production framework for artisanal and small-scale mining contribute to building the technical knowledge of civil society (http://communitymining.org/english/) counterparts where relevant, so that they are able to effectively • The Mining Journal engage. (http://www.mining-journal.com/html/Mining101.html) provides an online“Mining 101”guide on the basics of mining. Civil society vigilance is crucial to ensure meaningful EITI • uNECA has compiled training materials on“Management of Mineral implementation Wealth and the Role of Mineral Wealth in Socio-economic The EITI Validation process can help push governments to take Development”. (http://www.uneca.org/eca_resources/publications/sdd/Mining_ action on the EITI from the outside, but civil society needs to be %20modules_final.pdf). organised and vigilant about pushing its government and companies to implement from the inside. • The uNCTAD World Investment Report 2007 (http://www.unctad.org) covers recent trends in both the mining It is important to recognise that signing up to the EITI will not sector and the oil and gas sector. automatically mean involvement. Many mining companies have signed up to the EITI when told to do so by the government, but • uNCTAD also provides a Mineral Resources Form within its“Natural Resources and Sustainable Development Forum” have done little in the way of EITI implementation. (http://www.natural-resources.org/). Dr Elizabeth Bastida is Lecturer and Director of the International Mining • CommDev, the resource centre of the oil, gas and mining sustainable community development fund (http://www.commdev.org/) is a Programme and Dr Evelyn Dietsche is Lecturer in Energy and Mineral multi-donor initiative. Economics, both at the Centre for Energy, Petroleum and Mineral Law (MMSD) project and Policy in the University of Dundee. The Revenue Watch Institute • The Mining, Minerals and Sustainable Development by the International Institute for Environment and Development (RWI) is a non-profit organization that promotes the responsible (IIED) (http://www.iied.org/). management of oil, gas and mineral resources for the public good. • The International Council on Mining and Metals (ICMM) (http://www.icmm.com/) is the international industry association of the largest international mining companies and national-level mining associations. • The Swedish based Raw Materials Group (http://www.rmg.se/) provides data on production and on companies. • Some consultancy companies provide reports on industry trends, for example the Metals Economics Group (http://www.metalseconomics.com/). • The Framework for Responsible Mining project is a joint effort by NGOs, retailers, investors, insurers, and technical experts to outline environmental, human rights, and social issues associated with mining and mined products. Notes (http://www.frameworkforresponsiblemining.org). 1 This chapter has been produced by the Revenue Watch Institute (RWI) as a supplement to “Drilling Down: The Civil Society Guide to Extractive The Mining Journal has published two sector-specific books by phillip Industry Revenues and the EITI”, edited by David l. Goldwyn and Crowson: Inside Mining (1998) and Mining Astride (2003). An updated published by the RWI with lead authors commissioned being Evelyn version of both these publications is to be published in December 2008 Dietsche and Elizabeth bastida and additional contributions from the under the titled Unearthing Mining. RWI staff. ADVANCINGTHE EITI INTHE MINING SECTOR 111 1 ADVANCINGTHEEITIINTHEMININGSECTOR: IMPLEMENTATIoN ISSUES SEFToN DARBY and KRISTIAN LEMPA1 Executive summary The Extractive Industries Transparency Initiative has now become a standard for improving transparency and accountability in the majority of mineral and metals (mining) -rich countries. There are a number of features of the mining sector (as opposed to the oil and gas sector) which significantly influence how the EITI is implemented in such countries. This chapter focuses on four of those issues: deciding which companies to include in the process; whether to include payments to sub-national governments; addressing the issue of artisanal mining; and considering the impact of non-cash payments by companies. The chapter concludes with a number of recommendations on how EITI policy and guidance might be improved so as to better reflect the challenges of implementing the Initiative in the mining sector. Introduction ways in which companies seek to address the social and This chapter will briefly outline some of the factors which lead environmental impacts of mining and to distribute benefits to the differences of EITI programmes in mining countries, to local communities. compared to those being implemented in oil and gas-producing Finally, it should be noted that there are many important countries. The chapter pays particular attention to two issues: implementation issues (how to ensure that all companies the need for assessing material payments when deciding which required to report in an EITI process actually do report) which mining companies should be responsible for reporting as part of are not addressed in this chapter because they are not specific the EITI process, and the importance of revenues received by to the mining sector and are equally applicable to sub-national governments from mining companies. The chapter hydrocarbon-rich countries implementing the Initiative. Some concludes with some thoughts on two issues which are of these issues are explored in various guides recently produced presently not addressed as part of the EITI process but are by the EITI Secretariat.2 increasingly becoming an implementation issue: the inclusion or exclusion of artisanal and small-scale mining (ASM) from the Differences between the oil and gas sector and the EITI, and how to deal with“non-cash”payments made by mining sector and their impact on EITI implementation companies. The issue of non-cash payments, as well as It is important to first outline some points of difference between payments made to sub-national governments, is particularly the oil and gas sector and the mining sector which have a important because these are often the most visible and tangible significant impact on the way the EITI is implemented in mining 112 ADVANCINGTHE EITI INTHE MINING SECTOR countries and oil and gas-producing countries. Third, while direct state participation (through a state-owned First, the mining sector is characterised by a large number of company) is very common in oil and gas-producing countries, it companies of varying sizes exploiting diverse minerals and is less common in mining countries. In some ways this has the metals, while the oil and gas sector tends to be dominated potential to simplify EITI implementation as it removes the by a smaller number of large companies extracting only two complexity of including a company which both receives commodities (albeit of various grades). At the early exploration revenues from other companies on behalf of the government phase the mining sector is considerably less capital-intensive and makes payments to the government. In some EITI countries than the oil sector. There is also greater diversity in the functions financial information provided by state-owned companies has of mining companies, as smaller exploration companies often required additional scrutiny due to the inconsistent use of operate alongside major companies. This very large number of international auditing standards. It does mean, however, companies often makes tax administration and collection more that attention needs to be paid to the other ways in which difficult relative to the oil and gas sector. In the context of the governments hold interests in the mining sector. In Ghana, EITI it also raises the question of which and how many for example, the government has a 10% shareholding in all companies should be included in the EITI process – this is mining companies, and thus receives income from company discussed further below. dividend payments (which it reports as part of its EITI process). because oil and, to a lesser degree, gas (owing to the need Finally, while in oil and gas-producing countries revenues are for expensive transportation and storage facilities, or close captured primarily at the national/federal level, there is an proximity to markets) have clear international market values, increasing trend in the mining sector for significant revenues it is easier to price the value of production. In mining, to be paid to sub-national levels of government (such as state however, some products (e.g. sand and granite) may only be and regional governments, and local and district authorities). commercialised at a local level; others may be exported but be Sometimes these payments are made directly by the company priced relative to their proximity to other facilities (e.g. bauxite to the relevant authority, while in other cases funds are exports and their proximity to a cheap source of electricity redistributed via national revenue collection agencies. for a smelter); while other products (e.g. gold) can be sold This issue is discussed in greater detail below. internationally. Moreover, production-sharing arrangements (whereby a government receives a certain percentage of Which companies should be included in the EITI process? physical production) are relatively common in oil and As mentioned above, a common feature of the mining sector is gas-producing countries, whereas fiscal regimes in mining that it contains companies which vary immensely in size. While countries are more focused on a mixture of income/profit taxes, production in a country maybe dominated by a few large license payments and production royalties, rather than the companies, it is extremely common for there to be a large transfer of an actual portion of production to the government. number of small companies present as well, and this presents Fiscal regimes for the mining sector are often set on a national the question of whether all companies should be required to basis and can be relatively easy to follow, whereas in the oil and report as part of the EITI process. While one of the main EITI gas sector the fiscal regime often varies from field to field. criteria states that implementation should include all companies Secondly, mining companies almost always have a bigger operating in a country, the EITI Sourcebook further states that impact in the communities where they operate in terms of local “an entity should be exempted from reporting only if it can employment and the physical environment. because of their show with a high degree of certainty that the amounts it would visibility, the expectations and demands placed on mining report would in any event be immaterial”.3 This has led to companies by governments and civil society groups are often considerable debate on precisely what would constitute a high. This means that revenue transparency is sometimes seen material or immaterial level of payments, and no existing EITI as a“second order”concern in the mining sector compared to policy provides further clarity on this point. the more pressing issues of employment, occupational health As a result of this ambiguity in EITI policy, in practice the level and safety, local development and the rehabilitation of any of company materiality has been determined by the environmental damage. Revenue transparency is, however, very multi-stakeholder group managing the EITI process in each relevant to these primary concerns: mining companies often country. Not having a defined materiality standard has been voluntarily, or by law, contribute very significant amounts of seen as an inconsistency in the EITI by some, but in reality it money to community development, mine safety and increases the degree of country ownership of an EITI environmental rehabilitation. However, because revenue programme – what is immaterial in one country maybe transparency is a secondary rather than a primary concern, local considered very material in another. Table 1, below, summarises communities and civil society groups operating on their behalf the approach taken to materiality in various EITI countries. often have less interest in, or do not the possess the skills to engage in, programmes such as the EITI. ADVANCINGTHE EITI INTHE MINING SECTOR 113 Table 1. Approaches to company materiality in EITI countries Country Approach to materiality Ghana Eight mines owned by five companies are required to report – out of a total of 13 multinational companies and 300-plus smaller local companies operating in the country. These eight mines are responsible for 99% of all mineral royalty payments (based on 2004 data), which in turn constitute 89% of payments received by the government from those companies. Guinea All“industrial”companies are required to report, but there is no definition of what constitutes an industrial company. kyrgyz Republic Companies with an income of uS$5 million or more are required to submit reports to be audited as part of the EITI process. Companies with an income lower than this are required to submit reports on payments to government but are not required to be audited. Mongolia Companies making more than 200 million Tugrug (approx. uS$170,000) in payments per year to government are required to report, while companies making payments less than this are allowed to report only if they wish to do so. peru At the time of writing, the peru EITI Action plan envisages involving 19 mining companies which are responsible for approximately 75% of the value of total mining production. While it is an admirable to aim to include all companies in a • in order to be able to defend a materiality point, it is reporting process, such an ambition needs to be tempered by important for the administrator hired to reconcile payment two factors: (i) which companies have a significant and revenue data, and also to publish details of what macroeconomic impact and/or major development impact for a percentage of mining production value and payments to significant number of people; and (ii) what resources are government from the mining sector is covered by the available to carry out an EITI reconciliation or audit process. companies included in the process; Where resources are limited, a requirement that the audit • where a significant number of small companies are company appointed to produce the EITI report gather excluded from the EITI process for materiality reasons, it is information from all companies may in fact detract from the still useful for the government to provide details of the more important task of properly scrutinising the data it receives aggregate revenues received from all such companies for from major companies and government agencies. inclusion in the EITI report; and While a fixed materiality point based on the value of a • because companies regularly enter and leave the sector, it is company’s production or the amount of payments which they important to keep the list of companies required to report make to government may seem the easiest approach, it incurs their payments under constant review. the risk that the payments made by all the companies operating below the materiality point may cumulatively be quite Sub-national reporting significant. because of this it is perhaps better to develop a After the issue of company materiality, the next important issue materiality system in which all the companies which to address for mining countries implementing the EITI is how to cumulatively contribute a certain proportion of mining revenues treat payments which are made or redistributed to sub-national are required to report. For example the largest companies which levels of government.4 In an increasing number of mining in total contribute x% (x being a figure that would be defined by countries a portion of revenues is either paid directly by the EITI multi-stakeholder steering group) of total revenues companies to sub-national governments (e.g. state, regional, would be required to report. The government could then municipal or community-level governments), or there is a legal complement this figure with the total amount of revenues or constitutional formula for redistributing revenues from received from companies not included in the EITI process. national government back down to sub-national governments.5 by taking this hybrid approach an EITI report would account for Some types of revenues (e.g. land rents and license payments) the majority of mining company payments and the entirety of are often paid directly to sub-national governments. All these government revenues from the sector without placing excessive payments are often vital for maintaining local peace and reporting burdens on small companies. stability, redressing environmental damage or loss of livelihoods The lessons learned on this issue are clear: caused by mining operations, and contributing to economic • adopting a materiality point is often a practical way of development in the communities in which mines operate. focusing the efforts of the Initiative on the small number of This focus on ensuring that funds filter down to promote local companies which contribute most; economic development is important because, while mines are • the decision of what the materiality point should be needs highly visible and capital-intensive enterprises, they often to be taken by the multi-stakeholder group overseeing EITI produce revenues that are disproportionate to the implementation in a country. If a materiality point is comparatively small number of people they employ. Table 2 imposed from above by a government, there is a risk that provides examples of different formulas used in various other stakeholders will see it as an attempt by the countries for this kind of distribution of benefits.6 government to unfairly constrain the scope of the Initiative; EITI policy is silent on this issue. None of the EITI policy 11 ADVANCINGTHE EITI INTHE MINING SECTOR Table 2. Division of revenues between national and sub-national levels of government Country Division of mining revenues Democratic Republic of Congo under the terms of the Mining Code, 40% of collected mining royalties, as well as 10% of surface rents, should be returned to the provinces in which mining takes place. Of that 40%, 25% is retained for the provincial administration while 15% is given to the administration of the area where mining activities are conducted. In addition to this redistribution of royalties provided for in the Mine law, the Constitution stipulates that 40% of all tax revenues coming from national enterprises, including mining-related tax revenues, be redistributed to provincial governments. Ghana All income tax, dividends and royalties are paid to the national government. Of the royalties received, 90% is retained by the national government (80% in the consolidated fund, 10% in the minerals development fund), while the remaining 10% is distributed to the Administrator of Stool lands (1%), District Assemblies (4.95%), Stools/traditional authorities (2.25%), and traditional councils (1.8%). papua New Guinea At least 20% (though often more) of mining royalties is paid to local landowners while the remaining 80% is paid to sub-national governments. proceeds from state equity in mines are also redistributed to sub-national governments at varying rates. peru All company income tax and mining royalties are collected by the national government that then redistributes up to 50% of them to regional and municipal regional governments. In addition, companies with large profits have created social funds of different sizes for the benefit of local communities. documents provide a definition of“government”,and thus the control mechanisms to ensure a minimum of accountability EITI neither excludes nor includes sub-national government. In and coherence between sub-national and national practice both the reports produced in Ghana and Mongolia infrastructure development plans,8 while in others the include payments made to sub-national governments. In Ghana national government agencies have no right to scrutinise the efficacy of the redistribution of revenues to District such payments; and Assemblies and other local authorities has been examined, as • in some countries there are differing levels of authority, has how those local governments have used the revenues. In jurisdiction and mandate of the central versus provincial Mongolia the EITI reports also include voluntary donations governments to levy and impose taxes. This might lead to made by companies directly to sub-national government discrepancies between the revenues provided for by agencies. national regulation and taxes imposed on companies by It is clearly important to report on payments made to local authorities. sub-national levels of government if they are material. because of the direct proximity of mines to communities, and the bigger Dealing with artisanal and small-scale mining local footprint of mining operations, there is often considerable In some countries implementing the EITI there have been local demand for more information on the financial contribution discussions on whether or not to extend the EITI to the artisanal of mines to those communities. These revenues may appear to mining sector. Indeed, it could be argued that a lot of the early be small relative to those received at the national level, but are focus on the resource curse (which in turn was a driving force sometimes the major source of income for communities and behind the establishment of the EITI) was in fact focused on the sub-national governments in mining areas. While it might be links between artisanal mining and conflict in countries such as important to include such payments in an EITI process, some Angola, the Democratic Republic of Congo, liberia, and Sierra particular issues need to be addressed: leone. There has also been some recent research on the issue of • the administrative capacity, both in terms of personnel and how artisanal mining could be included within an EITI process.9 record keeping, of local revenue collection agencies and There are many obvious reasons why artisanal mining10 might finance departments is often weak relative to national be difficult to include within an EITI reporting framework, and agencies; indeed thus far no country has done so. The impact of revenue • revenues can be paid in a variety of ways – either directly from streams derived from artisanal activities on the macroeconomic the company to the sub-national government, or indirectly environment is low, due to almost negligible contributions to the by being redistributed through national revenue agencies national treasury.11 profit margins for the individual miners back to sub-national governments. This requires the audit themselves are far too low, and the miners themselves are too company hired to produce the EITI report to gather data not geographically spread out to allow for any meaningful taxation. only from national government, but also from a number of More often than not, the sector is extremely informal and subject often geographically remote sub-national government to limited effective regulation.12 Against this background, is it bodies; 7 worth thinking about the EITI in the context of artisanal mining? • resistance from sub-national governments to scrutiny or An estimated 13-20 million men, women, and children from control over such revenues by national agencies. In some over 50 developing countries are directly engaged in the countries national government agencies have introduced artisanal mining sector. Additionally, an estimated 100 million ADVANCINGTHE EITI INTHE MINING SECTOR 11 more are indirectly dependent on the sector for their livelihood. reasons alone, the issue of how to address artisanal mining in Moreover, in many countries, particularly in Africa, the artisanal the EITI is worthy of further consideration in EITI programmes.17 mining sector accounts for the vast majority of production – in the Democratic Republic of Congo it accounts for over 80% of Reporting on non-cash payments mining production;13 in the Central African Republic, almost Another issue that is of considerable debate in many EITI 100%.14 All together this implies that there are many more countries (both oil and gas, but particularly in mining) is that of people engaged in artisanal mining than are employed by how to handle non-cash payments. While in oil and multinational mining companies, which perhaps accounts for its gas-producing countries this is an issue of how to accurately high profile relative to its often small contribution to report the value of government production share, in mining government revenues.15 because of its widespread and very countries this is often focused on the provision of sometimes visible impact, and because of the large number of people it significant social services and goods by mining companies to employs, artisanal mining is often disproportionately visible as local communities. The provision of such goods and services is an issue in mining countries relative to its economic sometimes voluntary and sometimes required by the terms of contribution. the contract. Most often their provision is counted among To assess how the EITI could be extended to artisanal mining, operational expenses, and thus ultimately reduces a company’s a closer look at the value chain of the sector is revealing. The EITI tax liability. would need to intervene at the stage where (substantial) taxes The challenges of including such payments (sometimes are paid. In a simplified pattern, the miner sells his product to a referred to as para-fiscal payments) within an EITI programme dealer close to the mine who himself sells the product to a are obvious. There is no government agency which is receiving trading house with a license to export the product. The trading the payment, and thus one is entirely reliant on figures provided house will sell the product, sometimes already processed or by companies to assess the value of such work. This removes a purified, to an international buyer. The grade of formalisation key component of the EITI: the independent comparison and and the fiscal potential increase considerably along this value reconciliation of company and government data. The value of chain. In Sierra leone in 2005, uS$120 million of mainly such activities is often significant, and to omit it challenges EITI’s artisanally mined diamonds were exported by only 20 core tenet of the need to report on all“material payments”. exporters, who paid 3% export tax on those diamonds. Moreover, reporting a company’s tax and royalty payments in For the EITI to have any relevance in the artisanal mining isolation from their provision of social goods and services can sector, it would need to intervene at the point at which risk understating the true development impact and contribution significant and concentrated financial flows occur and taxes are of mining company operations.18 (sometimes) paid – i.e. it would need to focus on exporters and At present, only one country (Mongolia) has attempted to traders.16 In some countries, exporters effectively act as the address the issue of reporting the value of non-cash payments headquarters of a feudally structured corporation in which by companies as part of its EITI programme. While recipient investments for artisanal mining activities flow out from organisations may struggle to place an accurate value on the exporters through a multiplicity of intermediaries to the miners goods and services they receive, a value can be placed on them themselves, who in turn sell their product back up the chain to by the company providing them. Not being able to provide those exporters. In Ghana, for example, 10% of total gold comparative data might be an obstacle, but given the local production is accounted for by a single exporter buying solely significance of such payments, as well as their susceptibility to from artisanal miners. corruption, where the expenditures made by companies on Thus far, expanding the EITI to cover artisanal production has such payments are significant they should be included within been considered as an issue too difficult to address in the EITI the EITI process. by those countries implementing the Initiative. This is either In countries engaging in infrastructure-for-minerals contracts, because the sector lacks the required level of formalisation to there has been considerable debate over the value of such generate significant and concentrated revenue streams, deals. Most often the total value of the goods and services and/or because other issues related to artisanal mining provided under such terms is considerably less than would be (e.g. environmental impacts, health and safety, smuggling, realised from a more regular arrangement involving taxation the capture of revenues by armed groups) are perceived as and royalty payments because those goods and services are greater priorities. Still, artisanal mining is clearly an issue in EITI most commonly provided up front before significant value has countries such as the Central African Republic (where exporters been extracted from the mine. And because it is more difficult to are represented on the EITI multi-stakeholder steering group), place an exact value on the goods and services provided, there D.R. Congo, Guinea, liberia, and Sierra leone. Moreover, is possibly greater scope for either a poor deal or corruption. In operations by exporters tend to be significant, resulting in countries where tax and royalty revenues are captured material revenue streams to governments. For these two predominantly by elites who provide little or no public goods 11 ADVANCINGTHE EITI INTHE MINING SECTOR and services in return, it could be argued that non-cash governments in EITI programmes. This would need to payments ensure that citizens receive at least some benefit from include guidance on scrutinising not only mining operations. While it would clearly be very difficult to company-to-government transfers, but also include the value of such deals as part of an EITI process, greater intra-governmental transfers. Failure to include such transparency around them is needed so that the risks and payments seriously risks the perceived relevance of the EITI rewards of such arrangements for governments and the wider in countries where these payments are significant; public can be more accurately assessed. 4 donors involved in supporting EITI implementation should consider making resources available to sub-national Conclusion and recommendations governments involved in the EITI process; The EITI had a slow start in mining countries but now has a 5 exporters of artisanally mined metals and minerals should higher take-up rate in these countries than in those dominated be brought into the EITI process in countries where the by the oil and gas sector. This expansion of the EITI in such value of their exports is material; and countries is largely due to the realisation of revenue 6 where non-cash payments are material, EITI reports should transparency being a key part of addressing other concerns in attempt to obtain a value of those payments from the sector, and because of the very visible impact of mining companies, even if they cannot be reconciled with sector revenues at the community level. government accounts. The benefit of EITI implementation in all countries – regardless of industry – is becoming clearer. While the EITI does Sefton Darby is a consultant with S.E.B. Strategy Ltd and has worked on not have an explicitly forensic anti-corruption focus, there is EITI since 2003. Kristian Lempa is currently mining sector governance emerging evidence that it serves as a useful component in expert at GTz headquarters in Germany. he formerly worked on EITI corruption prevention by increasing scrutiny – and formalising programmes in DRC, Central Africa Republic and Ghana. civil society’s role in that scrutiny – of payments and revenues. The EITI is also increasingly being used to identify poor administration by providing a diagnostic of the efficacy of revenue assessment, collection, and (in some cases) redistribution systems. Most intangibly, but possibly of greatest value of all, is the EITI’s ability to reduce political tensions and risks to extractive industry investments by creating a forum in which all parties (government, companies, and civil society) regularly meet and come to better understand each other’s positions and concerns. This confidence-building aspect of the EITI is the most difficult to establish, but also has the potential to deliver long-term benefits by reducing the risk of conflict. It is clear that in a number of areas, EITI policy and guidance does not provide sufficient clarity on a number of issues important in mining countries. This chapter therefore recommends that: 1 the EITI board should consider whether it would be useful to provide further guidance or policy on what constitutes an acceptable overall materiality level – i.e. that successful EITI implementation needs to include companies responsible for a minimum percentage of the value of mineral and metal production; 2 the EITI board should consider producing guidance on how the issue of materiality will be dealt with in the Validation process. Multi-stakeholder groups that set a materiality point to exclude minor companies from the process need to be reassured that in doing so they are not making themselves vulnerable to being assessed as not being“EITI compliant”by the Validation process; 3 the EITI board should provide more explicit guidance on the need to include any material payments to sub-national ADVANCINGTHE EITI INTHE MINING SECTOR 11 Notes 1 This article has been produced by the World bank’s Oil, Gas and Mining 10 For the purposes of this discussion, artisanal mining is defined as policy and Operations unit (COCpO) with support from the EITI mining activity in which a person exploits minerals with a minimal Multi-Donor Trust Fund. The lead authors are Sefton Darby (consultant, amount of capital and fixed installations, mostly by rudimentary means. S.E.b. Strategy ltd) and kristian lempa, Conseiller en ITIE in the GTZ Small-scale mining activities in contrast involve a higher deployment of office in kinshasa, D.R. Congo. The authors are grateful for contributions capital and fixed installations. Artisanal mining as well as small-scale made by Craig Andrews, boubacar bocoum, Graeme Hancock, Charles mining is often informal in that it commonly operates illegally, and at Husband, Eleodoro Mayorga Alba, Anwar Ravat, paulo de Sa, and John the point of extraction does not make tax or royalty payments to a Strongman in the COCpO division. Any comments on this chapter can government. be sent to the authors at [email protected] and 11 Though it could be argued that the lack of revenues derived from [email protected] artisanal mining is caused by a lack of scrutiny (such as the EITI would 2 Those interested in better understanding the “how to” of EITI provide) on the tax payments – or lack thereof – of traders and implementation should consult core EITI policy documents (such as the exporters of minerals and metals. EITI Sourcebook and the EITI Validation Guide) available at 12 The EITI criteria and Validation Indicators specifically ask for http://www.eitransparency.org/document, as well as the following companies to report, something which assumes a certain grade of guides: the World bank’s “Implementing the EITI – Applying Early formalisation. lessons from the Field”, available at http://go.worldbank.org/C5OkJZ7860 ; the Revenue Watch Institute’s 13 D’Souza, k, “Artisinal Mining in the DRC: key Issues, Challenges and “Drilling Down – The Civil Society Guide to Extractive Industry Revenues Opportunities”. CASM, 2007. and the EITI”, available at 14 Runge, J. “Geologische Ressourcen und Transparenz im Rohstoffsektor http://www.revenuewatch.org/news/publications/drilling-down.php ; Zentralafrikas – eine GTZ Fallstudie (Afrikagruppe deutscher and the International EITI Secretariat and the International business Geowissenschaftler (AdG)”, Stuttgart, 2009 (forthcoming.) leaders Forum’s “EITI business Guide”, available at 15 http://www.eitransparency.org/document/businessguide . Figures from http://www.artisinalmining.org 16 3 page 29 of the EITI Sourcebook, which can be accessed at Many countries also require artisanal miners to buy licenses, which, in http://www.eitransparency.org/document/sourcebook aggregate, may constitute a material revenue stream for the recipient national or sub-national government authority. Individual license 4 A useful resource on this issue is Warner, M. and Alexander, k., payments, however, are very small, and thus if they were included in an “Sub-National Implementation of the Extractive Industries Transparency EITI reporting process it would only make sense for total license Initiative (EITI)”, Overseas Development Institute (2006), which can be revenues (rather than payments) to be reported. accessed at 17 http://www.odi.org.uk/iedg/business_Development_performance/pap In some countries this may require research specific to the mineral ers/ODI_pubSecCSR_SubNatImplementation.pdf concerned. For example, in Sierra leone the World bank is sponsoring research into the issue of transfer payments to diamond exporters – 5 Many oil and gas countries also have legal or constitutional i.e. is what these exporters receive from the sale of diamonds on arrangements for redistributing sector revenues to sub-national overseas markets – similar to the valuation of the diamonds which takes governments, but they are not always explicitly linked to the place in Sierra leone for the purposes of calculating export tax. communities or regions where production is actually taking place. 18 Also, because of the considerable environmental impact of mining Similarly, EITI policy states that the Initiative should focus only on operations, payments to sub-national governments in mining countries production-related taxes and payments and should not include details are often seen as compensation for the loss of natural resources, of payments related to ongoing operations such as customs duties, whereas revenues from the oil sector are more often seen (and treated) income taxes, and excise duties. Country experience on this point has as a region’s share in the nation’s natural resource endowments and are been mixed. Some countries (such as kazakhstan and Mongolia) have therefore less compensatory in nature. included customs duties payments and excise taxes in their EITI reports while other countries have not. Including such payments in an EITI 6 A very extensive list of sub-national revenue distribution models can report provides a far more comprehensive view of a company’s be found in Annex b of Warner and Alexander (2006) – see footnote 8 contribution to a country, particularly during construction of for full reference. production facilities when a company’s level of tax and royalty 7 The “tier” of sub-national government receiving revenues also has an payments will be minimal, even though the company will be having a impact on the ease with which data can be gathered. In some mining very visible impact in the community in which it operates. countries, revenues are paid or redistributed beyond regional governments to local communities and landowners. 8 Vigila peru, “Surveillance of Extractive Industries – National Report No. 7”, lima, 2008. 9 Garrett, N, “The Extractive Industries Transparency Initiative and Artisanal and Small-Scale Mining. preliminary Observations from the Democratic Republic of Congo”. The EITI Secretariat, 2007, available at http://www.eitransparency.org/research/garrett 11 ADVANCINGTHE EITI INTHE MINING SECTOR EITI publications EITI Rule Book EITI Business Guide Talking Transparency including Validation Guide how companies can support A guide for communicating the EITI This publication brings together the implementation of the EITI www.eitransparency.org/ EITI’s requirements for implementing www.eitransparency.org/ communication the EITI. It includes the EITI Principles, document/businessguide Criteria, The EITI validation guide and policy Notes issued by the EITI Secretariat, conveying decisions taken by the EITI Board. It does not change earlier agreed policies. www.eitransparency.org/ document/rulebook Further guidance FACT SHEETS are short EITI Guide for legislators EITI Source Book Implementing the EITI documents explaining elements how to support and strengthen A guide to assist countries that are Applying early lessons from the of the EITI policy: resource transparency implementing the EITI field (by the World Bank) EITI Fact Sheet www.eitransparency.org/ www.eitransparency.org/ www.eitransparency.org/docume www.eitransparency.org/ parliament document/sourcebook nt/implementingtheeiti document/factsheet How to support the EITI – Extractive Companies www.eitransparency.org/ companyimplementation How to support the EITI – Non-Extractive Companies www.eitransparency.org/ companyimplementation How to support the EITI – Countries www.eitransparency.org/supporters /countries EITI Endorsements www.eitransparency.org/document /endorsements Validation Fact Sheet Drilling Down www.eitransparency.org/eiti/ A civil society guide to the EITI implementation/validation (by RWI) www.eitransparency.org/civilsoci etyimplementation ABOUT THE CONTRIBUTORS Chapter 1 Chapter 12 Edward Bickham is the Executive Vice President of External Affairs Dr Alexandra Guáqueta is Public Affairs Advisor at Cerrejón and for Anglo American plc and Member of the EITI International Board. works on compliance with international corporate social Chapter 2 responsibility standards. Dr Francisco Paris is the Regional Director for Latin America and Chapter 13 responsible for mining issues and Dr Sam Bartlett is the Regional David W. Brown, PhD, is the EITI Senior Adviser in Indonesia, Director for Asia-Pacific, both, at the EITI International Secretariat in working under an MOU between the UK’s DFID and the World Bank. Oslo. Chandra Kirana is the Asia Pacific Coordinator for the Revenue Chapter 3 and Chapter 4 Watch Institute. Paul Mitchell is Director of Mitchell McLennan Pty Ltd, a specialist Chapter 14 environment and planning consultancy in Australia and former Dr Sixtus C. Mulenga is the General Manager of Corporate Affairs at President of the International Council on Mining and Metals (ICMM) Albidon Zambia Ltd, Council Member of the Zambia Chamber of and former Member of the EITI International Board. Mines, Member of the Zambia Extractive Industry Transparency Chapter 5 Initiative Council and World Bank Group Extractive Industry Dr Christopher Wright is Research Fellow, Grantham Institute on Advisory Group. Climate Change and Environment, London School of Economics Chapter 15 (LSE) and Visiting Researcher, Centre for Development and the Laura Missingham and Luke Bewley work in the Resources Division Environment (SUM), University of Oslo. at the Australian Department of Resources, Energy and Tourism. Chapter 6 Erica Ferguson is in the Governance and Anti-corruption, Group at Jonas Moberg is the Head of the EITI International Secretariat and the Australian Agency for International Development (AusAID). was a Senior Advisor to the UN Global Compact. Juan Carlos Quiróz Chapter 16 is a Policy Analyst in the Revenue Watch Institute in New York. Dr Lise-Aurore Lapalme is a Senior Policy Advisor working on Maaike Fleur is Sector Supplement Manager at the Global Reporting environmental, social and corporate social responsibility issues with Initiative, in charge of the development of the GRI Mining & Metals the Minerals and Metals Sector of Natural Resources Canada. sector reporting guidance. Chapter 17 Chapter 7 The ICMM is a CEO-led industry group that addresses key priorities Kristian Lempa is currently mining sector governance expert at GTZ and emerging issues within the mining sector. David Prescott was headquarters in Germany. He formerly worked on EITI programmes lead writer of the EITI Business Guide published in 2008. Paul in DRC, Central Africa Republic and Ghana. Delphin Tshimena is a Mitchell was President of ICMM until May 2008. World Bank mining consultant at the COCPO Division based in Chapter 18 Kinshasa. Dr Elizabeth Bastida is Lecturer and Director of the International Chapter 8 Mining Programme and Dr Evelyn Dietsche is Lecturer in Energy Dr David Nguyen-Thanh is the Tax and Governance Adviser in the and Mineral Economics, both at the Centre for Energy, Petroleum Good Financial Governance Programme of the GTZ in Accra, Ghana. and Mineral Law and Policy in the University of Dundee. The Maya Schnell is an EITI consultant who has been working for GTZ Revenue Watch Institute (RWI) is a non-profit organization that Ghana. promotes the responsible management of oil, gas and mineral Chapter 9 resources for the public good. Steve John, Socially Responsible Investment Manager for Chapter 19 ArcelorMittal. Marcus S. Wleh is Corporate Responsibility Sefton Darby is a consultant with S.E.B. Strategy Ltd and has worked Manager for ArcelorMittal Liberia. on EITI since 2003. Kristian Lempa is currently mining sector Chapter 10 governance expert at GTZ headquarters in Germany. He formerly Dorjdari Namkhaijantsan is the Manager for Economic Policy Issues worked on EITI programmes in DRC, Central Africa Republic and at the Open Society Forum in the Mongolian Foundation for Open Ghana. Society. Chapter 11 Fernando Ruiz-Mier is Senior Operations Officer at the International Finance Corporation’s Office of Advisory Services in Latin America and the Caribbean. www.eitransparency.org